Public goods, merit goods, and the relation between private and government consumption

In this paper, we investigate the relation between public and private consumption, by constructing a general government spending data set, by function, for 12 European countries. In particular, we split government consumption into two categories. The first category—“public goods”—includes defence, public order, and justice. The second category—“merit goods”—includes health, education, and other services that could have been provided privately. Equations from a relatively general permanent income model are estimated by GMM. The estimates are fairly robust in showing that public goods substitute while merit goods complement private consumption. However, the relation between merit goods and private goods turns out to be stronger than that between public goods and private goods. Thus, in the aggregate government and private consumption are complements.     

TAX DISCOUNTING VS. CROWDING OUT

The “crowding out” effect of debt-financed government spending on the private sector consumption-saving decision and on private investment behavior has been a controversial subject for several years. Do increases in debt-financed government spending stimulate private consumption and saving in the short run, as well as private consumption in subsequent periods? Or does the realization that future taxes must be raised to finance repayment of the debt result in a lack of stimulus for consumption as well as no detrimental impact on subsequent private saving? This article empirically tests for the presence and/or magnitude of tax discounting and crowding out, carefully distinguishing between the two, and decomposes government debt instruments according to their maturities in order to determine impact due to a reorientation of debt structure. The results do not support the existence of tax discounting, suggesting instead that government deficits do stimulate current consumption.     

‘Crowding out’ and the effectiveness of fiscal policy

‘Crowding out’ of private economic activity by public economic activity is a multidimensional concept. A taxonomy is proposed: the degree of crowding out, the time horizon considered, direct and indirect crowding out constitute the four main categories. The latter two each have many subcategories. With direct crowding out government economic activity directly enters as an agrument into structural private behavioural relationships. Indirect crowding out refers to crowding out in the reduced form of the model without there being any direct crowding out at the level of the structural private behavioural relationships. A small full employment model is used to analyse the implications of various forms of direct crowding out for the effectiveness of fiscal policy.     

The effect of inflation uncertainty on ‘crowding out’

It is widely recognized that expansionary fiscal policy can crowd out private investment. The degree of crowding out depends in part on the degree of substitutability between public and private securities. In this paper, we look at how inflation uncertainty affects this substitutability and the degree of crowding out. Depending on the covariance of the return of private securities with the rate of inflation, the degree of substitutability, and thus the level of crowding out, will diminish as inflation uncertainty increases. Indeed, an increase in government debt may actually decrease the real return required on private securities, leading to “negative” crowding out.     

Child abuse: Does public enforcement crowd out private vigilance?

We investigate whether increased public reporting of child abuse crowds out private reporting. We find, despite theoretical models suggesting significant crowding out, that public and private reports have risen nearly equiproportionately and that crowding out is small and not significant.     

Forms of Explanation; Rethinking the Questions in Social Theory

The aim of this study is to investigate whether the so-called crowding in effects of complementarity or the crowding out effects of substitution occurred between public investment and private investment in Brazil from 1982 to 2013. This will be carried out through a theoretical debate on the investment general dynamics and an econometric analysis of vector error correction (VEC) model for the Brazilian case. The trajectory of the Brazilian economy and the empirical results show the presence of crowding in between public and private investments in the period, in accordance with the Post-Keynesian approaches. The crowding in is justified by the effects on demand via the Keynesian multiplier and via the expansion of the domestic market (particularly provided by infrastructure) and by the effects on the supply of private capital through the reduction of production costs, the increase in productivity, and through structural changes facilitated by public policy. Complementarity with regard to both the investments of the public administration and of federal government-owned/controlled enterprises is confirmed. Furthermore, a significant causal relationship is observed between public investment and the output of industrial manufacturing, which, from the structuralist perspective, is a sector that is considered a driving force of the economy. The special contributions of this paper are its time series for public investment and the variety of models that show crowding in between public and private investment.     

R&D subsidies and private R&D expenditures: evidence from Italian manufacturing data

This paper uses a comprehensive firm level data set for the manufacturing sector in Italy to investigate the effect of government support on privately financed R&D expenditure. Estimates from a non‐parametric matching procedure suggest that public assistance has a positive effect on private R&D investment in the sense that the recipient firms achieve more private R&D than they would have without public support. This indicates that the possibility of perfect crowding out between private and public funds can be rejected. Furthermore, in this sample of Italian firms, tax incentives appear to be more effective than direct grants. The paper also examines whether public funding affects the financial sources available for R&D and finds that grants encourage the use of internal sources. The results also show some evidence of positive effects on credit financing for R&D.     

The effects of fiscal policy on economic activity in Finland

This study analyzes whether fiscal policy decisions have real effects on the economy of Finland, and if they do, what are the strength and durations of the effects. We utilise the Vector Stochastic Process with Dummy Variables (VSPD) method in our empirical work. This approach is a suitable tool to study event-based episodes. Fiscal policy shocks do have an effect on the economic activity of Finland when the time period 1990–2007 is investigated. A positive tax shock (or a policy that increases public sector revenues) seems to have a positive effect on Investment and GDP but the response of private consumption is mixed. Results clearly indicate that increase in Government spending crowds out private sector activity, and the effect takes place sooner than with the Revenue variable in question. This is a clear evidence for the crowding out effect.     

Private Information in the BBV Model of Public Goods

To analyze the private provision of a public good in the presence of private information, we explore the connections between two frameworks: the binary public good model with threshold uncertainty and the standard continuous model à la Bergstrom et al. Linearity of best responses in others' contributions is key to matching the two frameworks. We identify all utility functions that display this linearity, and we provide conditions ensuring that the minimal properties that Bergstrom et al. require for utilities are satisfied. Using techniques developed in the threshold uncertainty framework, we show existence and uniqueness of the Bayes‐Nash equilibrium—thus generalizing existing results—and we analyze its comparative statics properties. In particular, under the reasonable assumption that agents' income is stochastic and private information, we complement the full‐information crowding‐out and redistribution results of Bergstrom et al. If the government taxes agents' income proportionally and redistributes (expected) revenues lump sum, equilibrium public good provision can increase or decrease, even if the set of contributors is unchanged. Similarly, we show that crowding‐out can be one‐for‐one, less than one‐for‐one, or more than one‐for‐one. Finally, we extend our results to a multidimensional framework in which agents' unit costs of contributions are also private information.     

Does public‐sector employment fully crowd out private‐sector employment?

Employment matters for development because it can raise household income, lower inequality, promote economic growth, and contribute to political stability. Many countries have high rates of public employment, but what effect does this have on overall employment and unemployment rates? This paper investigates if and to what extent public‐sector employment crowds out (reduces) private‐sector employment. In particular, we estimate regressions of unemployment or private‐sector employment on two measures of public‐sector employment. The study uses an especially assembled dataset, which is novel for its coverage of a large sample of developing countries as part of a panel of rich and poor countries. Our results point to full or just about full crowding‐out for the entire sample. Unlike previous cross‐country studies, which were restricted to advanced economies, we are able to show that these results also apply to developing countries, although crowding‐out may not be quite as high as in advanced economies. The results mean that high rates of public employment have an offsetting large negative impact on private employment rates and do not reduce overall unemployment rates. With the qualifier that government activities may help the economy in other ways, our results imply that, rather than creating public‐sector jobs, scarce fiscal resources could be better spent on other developmental needs.     

A panel cointegration approach to estimating substitution elasticities in consumption

This paper investigates the relationship between government spending and private consumption. The general framework is a cointegration approach of Ogaki (1992) used to estimate the intratemporal elasticity of substitution between government and private consumption in a panel of 15 European countries. Recently developed non-stationary panel methodologies that assume cross-section dependence are applied. Results indicate an Edgeworth substitutability between private and public spending.     

The government spending and private consumption: a panel cointegration analysis

In this article, whether an increase in government spending will crowd out the private consumption is re-examined. This article augments the empirical literature by extending this issue to panel data. The empirical framework applies the panel cointegration model, dynamic OLS (DOLS), proposed by Kao and Chiang [On the estimation and inference of a cointegrated regression in panel data. Working Paper, Economics Department, Syracuse University, 1999.]. Evidence from 24 OECD countries indicates a significant degree of substitutability between government spending and private consumption when the real disposable income is included, which rejects the permanent income hypothesis. The existence of crowding out renders the Keynesian plea for expansionary fiscal policy unconvincing.     

Unemployment Insurance under Moral Hazard and Limited Commitment: Public versus Private Provision

This paper analyzes a model of private unemployment insurance under limited commitment and a model of public unemployment insurance subject to moral hazard in an economy with a continuum of agents and an infinite time horizon. The dynamic and steady‐state properties of the optimum private unemployment insurance scheme are established. The interaction between public and private unemployment insurance schemes is examined. Examples are constructed to show that for some parameter values increased public insurance can reduce welfare by crowding out private insurance more than one‐to‐one and that for other parameter values a mix of both public and private insurance can be welfare maximizing.     

Nonlinear effects of government debt on private consumption: Evidence from OECD countries

This paper investigates nonlinear effects of government debt on private consumption. The estimated consumption function shows smooth regime switching depending on the debt-to-GDP ratio, and a higher level of government debt crowds out private consumption to a greater extent.     

Keynesian Multipliers, Direct Crowding Out, and the Optimal Provision of Public Goods

This paper studies Keynesian multipliers in a macroeconomic model with monopolistic competition. We allow public and private consumption goods to be perfect substitutes in private utility. This enables us to study the effect of direct crowding out on the size of national income, profit and employment multipliers for a given rise in real public spending. A positive real national income multiplier is obtained if consumers value public consumption less than private consumption. In addition, we determine the effective marginal cost of public funds and the optimal provision of public goods, both in the short run and in the long run.     

Social Norms and Private Provision of Public Goods

The formation of social norms for voluntary contributions to a public good is analyzed in a game in which people have preferences for private consumption, a public good, and social approval. Each person chooses to be one of the two types: a contributor or a non‐contributor. Thereafter, each person meets people who can observe his type. A non‐contributor feels disapproval, whereas a contributor feels approval if he believes that a contributor observes his type. The game has two asymptotically stable states: one in which everybody is a contributor, and one in which nobody is a contributor. Governmental subsidization of the public good can move the society to the former state, whereas a governmental contribution to the public good can move the society to the latter. Indeed, this crowding in or crowding out prevails even after policy reversal.     

Public or Private Sector Wage Leadership? An International Perspective*

Whether a government acts as a wage leader, placing pressure on private‐sector wages (more open to competition), or whether it plays a passive role and merely follows wage negotiations in the private sector, there are important implications for macroeconomic development, particularly in small open economies and/or countries that are members of a monetary union, such as those of the European Monetary Union. With the notable exception of the case of Sweden, opinion on this issue is still divided. In this paper, we look at public‐ and private‐sector wage interactions from an international perspective (18 OECD countries). We focus on the causal two‐way relationship between public and private wage setting, confirming that the private sector, on the whole, appears to have a stronger influence on the public sector, rather than vice versa. However, we also find evidence of feedback effects from public wage setting, which affect private‐sector wages in a number of countries. When the private sector takes the lead on wages, there are few feedback effects from the public sector, while public wage leadership is typically accompanied by private‐sector feedback effects.     

Private and Givernment Investment: A Study of Three OECD Countries

This paper examines the relationship between private investment and government spending in Australia, Britain and the United States. Since all time series data are stationary in first difference and cointegrated, these series are represented by an error correction model. Variance decomposition and impulse response functions are employed to investigate the effects of government spending on private investment. Generally the empirical results provide limited support for "crowding out" effects of government investment on private investment. The rate of interest and the corporate profit ability showed significant effects on private investment in two out of three cases. [E62, E63]     

How widespread are nonlinear crowding out effects? The response of private transfers to income in four developing countries

This article investigates the relationship between household income and private transfers received in developing countries. If private transfers are unresponsive to household income, there is less likelihood of expansions in public social security crowding out private transfers. Most literature finds that private transfers are unresponsive, but this may be because responses have been obscured by the methods that ignore nonlinearities. Threshold regression techniques find such nonlinearity in the Philippines and scope for serious crowding out, with 30–80% of private transfers potentially displaced for low-income households (Cox et al., 2004). To see if these nonlinear effects occur more widely, semiparametric and threshold regression methods are used to model private transfers in four developing countries – China, Indonesia, Papua New Guinea and Vietnam. The results reported in this article suggest that nonlinear crowding out effects are not important features of transfer behaviour in these countries. The transfer derivatives under a variety of assumptions only range between 0 and ?0.08.     

Testing separability of public consumption in household decisions

In this paper we propose a sequential strategy, based on the microeconomic approach of the demand theory, in order to test for separability between private and public consumption. The aim of the present work is to verify, using a conditional almost ideal demand system, whether the different components of public consumption exert conditioning effects on the allocative structure of private spending. The empirical estimation of the model and the separability tests are developed for both a demand system in five functional categories of private spending, and for a demand system in six categories, where the private expenditures on those goods and services which can also be offered by the public sector are enclosed in a single functional category. The results of the separability tests, obtained using UK data for the 1974–2000 period, show that public individual consumption plays an important role in modifying consumer choices, while public collective consumption does not affect private consumption behaviours. The relationships between the different components of private spending and public individual consumption are both of substitutability and complementarity; in particular, we find that public individual consumption and the corresponding private expenditures on ‘Health, education, recreation and social protection’ are complements.