EVALUATING THE SOCIAL OPTIMALITY OF DURABLE PUBLIC GOOD PROVISION USING THE HOUSING PRICE RESPONSE TO PUBLIC INVESTMENT

Recent empirical work in public finance uses the housing price response to public investment to assess the efficiency of local durable public good provision. This article explores the theoretical justification for this technique. It points out that the logic justifying the technique for evaluating nondurable public good provision does not translate to the durable case. A model in which investment is determined by the interaction between a budget‐maximizing bureaucrat and a community's residents is used to demonstrate that the technique can falsely predict underprovision, falsely predict overprovision, or perform without error.     

Contribution to a public good under subjective uncertainty

This paper examines how voluntary contributions to a public good are affected by the contributors' heterogeneity in beliefs about the uncertain impact of their contributions. It assumes that contributors have Savagian preferences that are represented by a two‐state‐dependent expected utility function and different beliefs about the benefit that will result from the sum of their contributions. We establish general comparative statics results regarding the effect of specific changes in the distribution of beliefs on the (unique) Nash equilibrium provision of the public good, under certain conditions imposed on the preferences. We specifically show that the equilibrium public good provision is increasing with respect to both first‐ and second‐order stochastic dominance changes in the distribution of beliefs. Hence, increasing the contributors' optimism about the uncertain benefit of their contributions increases aggregate public good provision, as does any homogenization of these beliefs around their mean.     

Should governments stop subsidies to private goods? Evidence from rural Latin America

This paper empirically documents the effects of subsidizing private goods to the detriment of the government's supply of public goods. We use a new data set from the rural sector in fifteen Latin American countries over the period 1985–2001 collected using a methodology that allows us to separate government subsidies to private goods from expenditures in the provision of public goods. The econometric evidence shows that the government's decision to subsidize either private or public goods has dramatic consequences for economic development. Reducing the share of subsidies to private goods (or, equivalently, increasing the share of public goods) in the government's budget has, ceteris paribus, a large and significant positive impact on rural per capita income, reduces certain undesirable environmental effects associated with output expansion, and contributes to poverty reduction.     

The electoral migration cycle

This paper proposes a new test of Tiebout sorting that relies on the exogenous time structure of recurrent local elections. The test is based on the idea that competitive elections represent periodic perturbations to the Tiebout equilibrium of local public good provision and allocation of households to communities, so that their schedule should affect the timing of households' sorting decisions. On the other hand, internal migration flows that have nothing to do with the demand for public goods over which localities vote recurrently ought to be orthogonal to the timing of elections in a reduced-form migration equation. I exploit the staggered schedule of mayoral elections in Italy to analyze migration, elections, and public budget data across several thousands of municipalities, and find evidence of a systematic influence of the electoral calendar on the timing of sorting decisions.     

Uncertainty and the Voluntary Provision of a Pure Public Good in a Two‐Moment Decision Model

In this paper, we explore the potential benefits of uncertainty that may arise in a two‐moment model of the voluntary provision of a pure public good. We find that an increase in a given contributor i’s risk associated with the aggregate contribution level of the other contributors (i.e., an increase in social uncertainty) induces that contributor to increase his own contribution level if and only if the uncertainty's incremental effect on the expected value of his net marginal utility is negative. Contributor i’s welfare likewise increases when a closely related condition is met, namely that the uncertainty's marginal effect on his expected marginal utility value of the public good exceeds its countervailing effect on the numeraire. Further, the corresponding aggregate contribution to the public good increases in the presence of free‐riding if and only if the incremental effect of contributor i’s contribution on the aggregate expected value of all other contributors’ net marginal utilities is small‐enough positive. We derive similar conditions for the case of private uncertainty, where the increase in contributor i’s risk is associated with his own marginal valuation of the public good. A simple example illustrates these conceptual results. Numerical analysis demonstrates that an increase in private uncertainty can have a nonmonotonic impact on contributor i’s welfare.     

The Reform of Local Public Utilities in Italy

The Italian system of local public utilities has recently undergone an important reform process. The first round of reforms, introduced in the 1990s, represented a remarkable change in the social welfare function with regard to the management of local public utilities. The legislation was specifically designed to cut costs and reduce deficits. A second round of reforms, required by European directives, started around the mid-1990s. Several laws were passed introducing important innovations and regulating specific sectors: public transport; electricity; and gas. Article 35 of the 2002 Financial Law was the final step in a comprehensive reform of the whole local public utility sector. The main innovations of the Financial Law concerns liberalization. Article 35 states that the general rule for awarding service provision contracts is competitive tendering; the rationale is obviously that of competition for the market. The general rule as expressed by Article 35 is nevertheless limited during the transition period. In the long run, competitive tendering will become the normal way of awarding contracts for local public utility provision. Even if there are doubts that full competition will be introduced into the sector, liberalization does appear to be having an effect, forcing many local public utilities to become more efficient. The changes introduced have brought about a better and a more efficient system with a greater number of large size enterprises and on the average a more active management.
In the future, the liberalization process may come to a standstill due to an insufficient number of competitors. Strong public administrations are therefore needed to prevent opportunistic behaviour by private firms.     

The effect of EPA enforcement funding on private-sector pollution-control investment

The paper estimates the effects of the US Environmental Protection Agency (EPA) enforcement budget upon the demand for pollution-control equipment in the private sector. There are two possible effects. A direct effect occurs when the enforcement budget is used for inspections that result in enforced compliance requiring additional pollution control equipment. A second effect is anticipatory, and arises from the private sector's objective of minimizing expected costs due to fines imposed by the EPA for infractions of pollution-control requirements. This component of demand depends, in part, on the EPA enforcement budget. We find that increases in the EPA budget increase the demand for pollution-abatement equipment. This in turn implies that increases in the EPA enforcement budget have been effective in mitigating pollution.     

THE OPTIMAL DIVISION OF GOVERNMENT EXPENDITURE BETWEEN PUBLIC GOODS AND TRANSFER PAYMENTS

This paper examines the optimal ratio of transfer payments to expenditure on public goods, for a given income tax rate. The transfer payment is then determined by the government's budget constraint. The optimal ratio of transfers to public good expenditure per person is expressed as a function of the ratio of the median to the arithmetic mean wage, and of the tax rate. Reductions in the skewness of the wage rate distribution are associated with reductions in transfer payments relative to public goods expenditure, at a decreasing rate. Furthermore, increases in the tax rate, from relatively low levels, are associated with increases in the relative importance of transfer payments. But beyond a certain level, further tax rate increases are associated with a lower ratio of transfers to public goods, because of adverse incentive effects.     

Questions About the Initiative of the European Commission Concerning the Awarding and Compulsory Competitive Tendering of Public Service Concessions

The ruling of the European Commission is that the award of contracts by regional or local authorities for the provision of services of general economic interest must be done by way of competitive tendering. Such contracts must not be awarded to the authority's own public enterprises or to any other enterprise, including by means of unilateral State act, without a call for tenders, a practice that had previously been common in many Member States. Public service concessions are also subject to the competition rules of the EC Treaty. Should the European Commission enact a directive concerning compulsory competitive tendering, this would result, for several Member States, in a serious change of paradigm as regards the awarding of public service concessions. Against this background, this article will attempt to find answers to the following questions: —How is the present relationship of the regional or local authority with its own public enterprise to be considered? —Are there any limits to applying the rules on competition of the EC Treaty to public service concessions? —What kind of positive and negative effects concerning economic efficiency and supply of specific public services result from the awarding of public service concessions and from compulsory competitive tendering? —What kind of, and what amount of, transaction costs result from compulsory competitive tendering and from the awarding of concessions? —Does competitive tendering work properly, and are public tenderers given equal opportunities? —Are there any alternatives to compulsory competitive tendering that would achieve an efficient market performance and provide sufficient supply?     

On the evolution of conditional cooperation

A long series of laboratory and field experiments, as well as conventional empirical studies, has established that (1) individuals voluntarily provide themselves with public goods at levels exceeding those predicted by the Nash voluntary contributions mechanism, and (2) agents reciprocate increases in the contributions of their counterparts in such settings (conditional cooperation). This paper presents a simple model of the evolution of preferences for conditional cooperation in the presence of a public good, which explains these two empirical findings without employing reputational or group selection arguments. In this model, individuals inherit preferences to match other agents' contributions to the provision of a public good, at some specified “matching rate.” Agents whose preferences induce them to be relatively successful – in material terms – increase in number, from one generation to the next. Under complete information and with randomly matched groups of N agents who have quasilinear preferences over the public good and a private good, the unique evolutionarily stable matching rate is 1, leading to Pareto optimal voluntary provision of the public good, regardless of group size N. The evolutionarily stable matching rate can be viewed as an endogenous social norm.     

Tullock's Puzzle in Pay‐and‐Play Lobbying

We explain Tullock's puzzle of small payments from special interests to policy‐makers by the hold‐up problem between the two parties. We construct a simple lobbying environment where an uninformed policy‐maker is a price‐setter who sells access to two opposed and privately informed lobbyists. The key equilibrium property is “the curse of the ex ante favored lobbyist”; the lobbyist proposing a project with the higher expected public value ends up worse off than the lobbyist proposing a project with the lower expected public value. In the absence of contribution caps, the ex ante favored lobbyist strategically devalues her project, and the resulting competitive devaluations destroy private values, revenues, as well as correlated public values. Ex ante, the policy‐maker benefits from a binding contribution cap protects the ex ante favored lobbyist, eliminates competitive devaluations, and thus remedies the hold‐up problem.     

The Real Structural Imbalance and Fiscal Stance in Australia during the Postwar Era

By using the concept of the constant employment budget balance and changes in real public debt it is possible to determine the size of Australian Government's real structural budget imbalances during the postwar era. In doing so it is possible to partially explain the short run fluctuations in economic activity and comment on the ability of the Federal Government to influence the level of economic activity.     

Can a Mixed Health Care System be Desirable on Equity Grounds?*

Should health care provision be public, private, or both? We consider this question in a setting where people differ in their earnings capacity and face some illness risk. We assume that illness reduces an individual's time endowment when waiting for treatment. Treatment can be obtained in a competitive private sector (through private insurance) or in the National Health Service (NHS) where it is provided free of charge but after some (endogenous) waiting time. The equilibrium in the health care sector consists of a waiting time in the NHS such that no patient wants to switch health care provider. This equilibrium is governed by two public policies: the income tax system and the size of the NHS. We find that: (i) a mixed system with a small NHS is never desirable; (ii) actuarially fair sickness insurance is never desirable either; (iii) a mixed system with a sufficiently large NHS may improve on a pure public system if the dispersion of earnings capacities is large enough; and (iv) the welfare gains from such a mixed system are not likely to be significant.     

Woodsy the optimal owl: Environmental campaigns, norms, and implications for public goods policy

Norms regarding private provision of a public good (e.g. cutting down on energy use, not littering) can affect the marginal gains from contributing to a public good and therefore people's decisions about contributing to the public good. A model is proposed in which norms of private contributions to a public good can be influenced by public policy, and these norms affect people's self-image, which derives from a comparison of one's own contribution with the norm contribution. In this context, we examine the conditions under which private contributions to a public good are efficient, and the conditions under which policy affecting these norms improves social welfare. We find that (1) a benevolent social planner who fails to account for private provision norms will underprovide the public good, and (2) public policy that attempts to raise the norm contribution of private provision can increase social welfare if the effect of raising the norm does not have an extreme negative effect - either extremely small or extremely large - on peoples' self-image.     

Corruption and the Provision of Public Output in a Hierarchical Asymmetric Information Relationship

This paper develops a principal‐agent model to explore the interaction of corruption, bribery, and political oversight of production. Under full information, an honest politician achieves the first best while a dishonest politician creates shortages and bribes. Under asymmetric information, an honest politician may create more shortages relative to a dishonest one, but the latter creates more bribes. The model identifies a tradeoff between bribery and efficiency. This helps to reconcile some conflicting results on the implications of corruption for the size of the public sector. It also provides new results on the circumstances under which an improvement in the auditing technology is beneficial. The paper identifies conditions under which corruption is welfare enhancing. However, the paper also shows that under precisely these conditions private provision, even by an unregulated monopolist, would be better than public provision.     

COMPETITIVE LONG RUN INDUSTRY EQUILIBRIUM AND FACTOR-PRICE UNCERTAINTY*

In this paper we have considered competitive long run industry equilibrium with factor-price uncertainty. We discussed the long run equilibrium output of firms with risk neutrality, output price and their responses to changes in uncertainty, factor price and industry demand. In the first part of this paper we have derived a result that, given risk neutrality, the firms operate at proper capacity, i.e. where expected long run marginal cost is equal to expected long run average cost, as shown in the case of output-price uncertainty. This result is, however, different from that obtained from Sheshinski and Dréze (1976). From the comparative static analysis we first discovered that even under risk neutrality factor-price uncertainty affects the long run industry equilibrium: that is, a mean preserving increase in uncertainty leads firm's to enter the industry, because they can decrease expected long run costs as the variability of factor price increases. Consequently, output price goes down. In contrast, firm size is kept invariable in response to its increase as long as the cost function is separable, i.e. the separability of the cost function holds when production functions are the Cobb-Douglas and CES types used commonly in empirical work, although firm size might, generally, be affected by the increase. It is an interesting fact that firm size and industry size will express different responses to a change in risk. The result that the long run industry equilibrium with cost uncertainty is explicitly affected is a sharp contrast to the result under output-price uncertainty and provides a new aspect for understanding about the behaviour of the industry with uncertainty. Secondly, increased factor-price causes the number of firms in the industry to decline and output price to rise. In addition, firm's size will expand with its increase if that factor is inferior, while the effect on firm size is ambiguous if it is normal. The firm's output, i.e. firm size, is, however, kept constant if the cost function is separable. Thirdly, the long run equilibrium output of the firm remains intact but the number of firms increases as industry demand rises. This result holds, regardless of the firm's attitude towards risk. Finally, we find throughout the paper that the functional form of the cost function plays a significant role in determining the behaviour of the industry with factor-price uncertainty.     

STRATEGIC BUDGET CONSTRAINTS IN A UNIONIZED MIXED OLIGOPOLY

This paper considers the budget‐constraint problem where the government decides whether or not to impose a budget constraint on the public firm, assuming the public firm is less efficient than private firms. We find that imposing budget constraints on the public firm is the preferred choice because of the welfare‐improving effect. Our model suggests that the wage levels of the public firm can be lower or higher than those of private firms depending upon the degree of inefficiency. These results differ from Ishida and Matsushima's findings that in a unionized mixed duopoly, tight budget constraints can enhance social welfare when the public firm is as efficient as private firms.     

Endogenous Government Expenditure: A Test of Wagner's Hypothesis For Hong Kong

In the last two decades a revival of interest in wagner's thesis of an endogenous public sector has led to a series of empirical tests of its validity. In its barest essentials, this paper attempts to find efficient estimates of income elasticities of demand for real total government expenditure as well as for its disaggregated functional groups as a means of verifying Wagner's expectation for the Hong Kong economy. Our empirical estimates indicate that Hong Kong's public finance setting is a synchronization of a worldwide tendency for public sector expansion according to the Wagnerian expectation. These findings lead us to raise a number of policy questions concerning the financial sustainability of Hong Kong's budget system over time. [320]     

The Tax‐smoothing Hypothesis: Evidence from Sweden, 1952–1999

This paper tests Barro's (1979) tax‐smoothing hypothesis using Swedish central government data for the period 1952–1999. According to the tax‐smoothing hypothesis, the government sets the budget surplus equal to expected changes in government expenditure. When expenditure is expected to increase, the government runs a budget surplus, and when expenditure is expected to fall, the government runs a budget deficit. The empirical evidence suggests that the model provides a useful benchmark and that tax‐smoothing behavior can explain about 60 percent of the variability in the Swedish central government budget surplus.