Strategic provision of local public inputs for oligopolistic firms in the presence of endogenous location choice

We develop a model in which two regional governments compete for a mobile oligopolistic firm by providing local public inputs. The central mechanism of our model is the interaction of an agglomeration advantage (partial nonrivalness of the local public inputs) and an agglomeration disadvantage (costs associated with the change of location of firms). We show that a central government of both regions induces an interregionally optimal allocation of firms by providing the optimal levels of local public inputs. The decentralized provision of local public inputs by regional governments, however, leads in most cases to a (interregionally) suboptimal allocation.     

Fiscal decentralization and macroeconomic management

The purpose of this paper is to address a central question in fiscal federalism - whether or not fiscal decentralization implies serious risks for fiscal discipline and macroeconomic management for the nation as a whole. This paper addresses this important issue by drawing upon the existing evidence regarding macro management and fiscal institutions in federal and unitary countries. This is supplemented by cross country regression analysis plus the analysis of two case studies: the Brazilian federation and the unitary regime in China. The main conclusion of the paper is that decentralized fiscal systems offer a greater potential for improved macroeconomic governance than centralized fiscal regimes. This is because the challenges posed by fiscal decentralization are recognized and they shape the design of countervailing institutions in federal countries to overcome adverse incentives associated with incomplete contracts or the “common property” resource management problems or with rent seeking behaviors. JEL Code E6 · H7 · H1     

Centralized vs. Decentralized Redistribution: A Case for Interregional Transfer Mechanisms

According to conventional wisdom, Musgrave's RedistributionBranch should be assigned to the central level of governmentin a federation. Otherwise, fiscal externalities created by themobility of the poor would render decentralized redistributioninefficient, if not impossible. The paper objects to this viewand argues that decentralized intraregional redistribution canyield efficient outcomes if it is combined with cleverly designedinterregional transfer mechanisms. Within a general frameworkwe give necessary and sufficient conditions for interregionaltransfer schemes to implement efficient allocations as Nash equilibriaof a decentralized redistribution game.     

Equal sacrifice and fair burden-sharing in a public goods economy

Applying a willingness-to-pay approach known from contingent valuation in environmental economics, we develop an ordinally based measure for the size of individual sacrifice that is connected with an agent’s contribution to a public good. We construct a selection mechanism that picks the unique efficient solution among all allocations that have an equal sacrifice as defined in this way. We show that the solution thus obtained corresponds to Moulin’s egalitarian equivalent allocation, conforms to both the ability-to-pay and the benefit principles, and has much in common with the Lindahl equilibrium.      

Overlapping tax revenue,soft budget,and rent seeking

This paper investigates how the soft-budget constraint with grants from the central government to local governments tends to internalize the vertical externality of local public investment by stimulating local expenditure when both the central and local governments impose taxes on the same economic activities financed by public investment. The model incorporates the local governments’ rent-seeking activities in a multi-government setting. The soft-budget constraint is welfare deteriorating because it stimulates rent-seeking activities, although a soft-budget game may attain the first-best level of public investment.     

Central versus local education finance: a political economy approach

This paper models voters’ preferences over central versus local education policies when there are private alternatives. Education is financed by income taxes and individuals are mobile between communities. Public education levels are chosen by majority vote. Contrary to conventional wisdom, centralisation may benefit the rich and poor, while the middle class prefer decentralised education. The model is also extended to include peer effects. Peer effects increase the support for central school finance, even in the community with good public schools.      

Corruption and Transparency in a Growth Model

We develop a Ramsey type model of economic growth in which the “Engine of Growth” is public capital accumulation. Public capital is a public good, and is financed by taxes on private output. The government may either use the taxes gathered to fund public capital accumulation or consume the resourses itself; that is engage in corruption. There is an irreducable level of endogenously determined corruption which constitutes rents for which potential governments compete. This competition takes the form of choosing a time path for public capital invesment, which implies time paths for output and household consumption. We study both the model’s steady state, and dynamical behavior along the saddle path. The predictions of our theory accord well with the existent empirical evidence on the relationships between the level and growth rate of output, corruption, public investment and fiscal transparency. Our analysis also provides a perspective on the transition experiences of several Eastern European economies. JEL Code: O41, H41     

Tradeoffs of foreign assistance for the weakest-link global public goods

Weakest-link global public goods, such as international security, communicable disease prevention or illegal trafficking control, create a strong incentive for rich countries to unilaterally compensate for insufficient supplies of the ‘weakest-link’ inputs by poor countries. We analyze how foreign assistance affects the donor and recipient countries, accounting for discontinuities and non-monotonicities originating from switches between structurally different equilibrium profiles. We show that voluntary foreign assistance improves provision of the public good and also welfare, but makes the donor country worse off for the medium level of income inequality. Unless inequality is large or small, a rich country may benefit from a commitment to the absence of assistance.     

The role of hedge funds as primary lenders

We examine the role of hedge funds as primary lenders to corporate firms. We investigate both the reasons and the implications of hedge funds’ activities in the primary loan market. We examine the characteristics of firms that borrow from hedge funds and find that borrowers are primarily firms with lower profitability, lesser credit quality, and higher asymmetric information. Our results suggest that hedge funds serve as lenders of last resort to firms that may find it difficult to borrow from banks or issue public debt. We also examine the effect of hedge fund lending on the borrowing firms and find that borrowers’ profitability and creditworthiness improve subsequent to the loan. This beneficial effect of hedge fund lending is corroborated by our finding of positive abnormal returns for borrowers’ stocks around the loan announcement date. Overall, our findings are consistent with hedge funds adding value through their lending relationships and financial markets perceiving these activities as good news for the firms.     

Imperfect competition,indirect tax harmonization and public goods

This paper shows that the welfare implications of indirect tax harmonization in a two-country imperfectly competitive framework, are, in general, indeterminate in the presence of public goods: Both countries can be made either worse off or better off. This holds under both the destination and origin principles of taxation and is in sharp contrast to existing results where revenue effects are not present. A consequence of this indeterminacy is that a precise evaluation of tax-harmonizing policies under both tax regimes requires an explicit consideration of the underlying preferences for private and public goods as well as the oligopolistic sectors’ relative cost structures. JEL code F15⋅ H21⋅ H41⋅ H87     

Lotteries, public good provision and the degree of rivalry

Under the standard summation technology, pure public goods can be provided via the direct contributions mechanism, even in an arbitrarily large group. However, if the public good exhibits any degree of rivalry, individual consumption of the public good will fall to zero as group size grows large. Thus, the direct contributions mechanism is not robust to the introduction of rivalry. By contrast, Morgan’s (Review of Economic Studies 67:761–784, 2000) lottery mechanism is robust to the introduction of rivalry when the lottery prize is proportional to group size. The lottery mechanism can provide public goods in a large group when the public good exhibits a degree of rivalry, provided that the degree of rivalry is not too high. This suggests that the lottery mechanism can provide a broader range of public goods in a large group than the direct contributions mechanism.     

A comment on the role of prices for excludable public goods

Blomquist and Christensen [(2005). The role of prices for excludable public goods, International Tax and Public Finance, 12 ,61–79] argue that welfare is initially decreasing in the price of an excludable public good and that the case for a positive price for an excludable public good price is weak. We argue that this result follows from their particular characterization of the public good and that an alternative and equally reasonable characterization overturns their result. Hence, the policy case for a positive price on the public good is stronger than Blomquist and Christiansen suggest. JEL Classification H21 · H41     

Shared Tax Sources and Public Expenditures

This paper deals with a specific vertical assignment of public functions in a federation: Two levels of government share both the same tax source and expenditure on a productivity increasing public service. We consider surplus maximizing Leviathan governments which provide public services in order to increase their potential tax base. The Nash equilibrium is characterized by overtaxation and relative to surplus maximization—depending on whether or not the public goods are sufficiently complementary with the entire tax base—either underprovision or overprovision of the public service. The implications of these results, in terms of welfare and potential use for earmarking taxes are also considered.     

Interregional redistribution through tax surcharge

The paper considers a utilitarian federal government that levies a tax to finance a national public good or to effect a redistributive policy. Regions differ in their incomes and in their preferences for a local public good. First, we assume that the central government observes each region's public expenditures (and, hence, local tax revenues) but cannot perfectly observe revenues and preferences. We derive the (constrained) Pareto-efficient allocation and show how it can be implemented by a surcharge on local taxes. The level of redistribution that can be achieved is limited by the fact that it may be difficult, or even impossible, to distinguish low-income regions with a high preference for the public good from high-income regions with a low preference. Then we allow for the possibility that the central government can observe incomes through a costly audit. We examine the optimal audit policy and study the impact of audits on the optimal taxation scheme. Throughout the paper we focus on the properties of average and marginal tax rates and on the resulting under- or overprovision of regional public goods.     

Does competition for capital discipline governments? The role of fiscal equalization

This paper examines how a fiscal equalization system affects the disciplining effect of competition for capital among heterogeneous regions in a decentralized economy. I build a model in which regions that are heterogeneous in initial endowments try to attract capital by competing public input that enhances the productivity of capital; meanwhile, a fiscal equalization system is imposed by the central government to reduce regional disparities in fiscal capacity. The key prediction, borne out in data from the German equalization system, is that while competition for capital strengthens discipline in the well-endowed regions, it weakens discipline in the poorly endowed regions. However, a conventional equalization transfer scheme, common to many countries, can be effective in correcting the distortion driven by the heterogeneity of initial endowments across competing regions.     

Within-industry timing of earnings warnings: do managers herd?

An earnings surprise can be caused by a combination of firm-specific factors and market or industry factors. We hypothesize that managers have an incentive to time their warnings to occur soon after their industry peers’ warnings to minimize their apparent responsibility for earnings shortfalls. Using duration analysis, we find that firms accelerate their warnings in response to peer firms’ warnings. We conduct several tests to control for alternative explanations for warning clustering (for example, common shocks and information transfer) and conclude that the observed clustering is primarily due to herding. Our study is one of the first to empirically examine managers’ herding behavior and the first to document clustering of bad news. Moreover, we provide a multi-firm perspective on managers’ disclosure decisions that alerts researchers to consider or control for herding when they examine other determinants of managers’ disclosure decisions.     

Tax Evasion and Auditing in a Federal Economy

This paper analyzes the relation between tax auditing and fiscal equalization in the context of fiscal competition. We incorporate a model of tax evasion by firms into a standard tax competition framework where regional governments use their audit rates as a strategic instrument to engage in fiscal competition. We compare the region’s choice of audit policies for three different cases: A scenario of unconfined competition without interregional transfers, a scenario with a gross revenue equalization (GRS) scheme and finally, a scenario with net revenue sharing (NRS), where not only the revenues from taxation but also the regions auditing costs are shared. Without regional transfers, fiscal competition leads to audit rates which are inefficiently low for revenue-maximizing governments. While in general GRS aggravates the inefficiency, NRS makes the decentralized choice of auditing policies more efficient.JEL Code: H26, H71, H77     

Politicians’ motivation,political culture,and electoral competition

We study electoral competition among politicians who are heterogeneous both in competence and in how much they care about (what they perceive as) the public interest relative to the private rents from being in office. We show that politicians may have stronger incentives to behave opportunistically if other politicians are more likely to behave opportunistically. A political culture may therefore be self-reinforcing and multiple equilibria may arise. We also show that politicians’ incentives to behave opportunistically increase with politicians’ pay and with polarization of policy preferences. JEL Code D72 · D78     

Biased voluntary disclosure

We provide a bridge between the voluntary disclosure and the earnings management literature. Voluntary disclosure models focus on managers’ discretion in deciding whether or not to provide truthful voluntary disclosure to the capital market. Earnings management models, on the other hand, concentrate on managers’ discretion in deciding how to bias their mandatory disclosure. By analyzing managers’ disclosure strategy when disclosure is voluntary and not necessarily truthful, we show the robustness of voluntary disclosure theory to the relaxation of the standard assumption of truthful reporting. We also demonstrate the sensitivity of earnings management theory to the commonly made mandatory disclosure assumption.     

Information relevance, reliability and disclosure

This paper examines the relation between information’s properties, such as reliability and relevance, and public disclosure policy. It shows that the optimal accounting system often involves a carefully balanced combination of mandatory and voluntary disclosure, with mandatory reporting focused on more reliable information. The emphasis on reliability causes the welfare-maximizing mandatory report to consistently lag behind the financial market in incorporating value-relevant information.