Aid effectiveness,governance and public investment

In this paper, we develop a growth model in which aid finances infrastructure investment and pro-poor spending in order to analyze ways through which aid can be made more effective. We assume that the recipient countries are aid-dependent in the early phase of development and that they ultimately become independent. In the model, donors can accelerate a recipient's independence from aid by investing in infrastructure. We demonstrate that even a small increase in aid can improve aid effectiveness and that aid effectiveness depends more on the growth rate than on the efficiency of the government.     

Directed search, unemployment and public policy

Abstract .  We examine the effects of public policy parameters in a simple directed search model of the labour market, and contrast them with those in standard random matching models with Nash bargaining. Both finite and limit versions of the directed search model are considered, and the value of the limit model as an approximation of the finite one is assessed. As with the random matching model, job creation is the key channel through which the policy parameters affect the equilibrium of the directed search model. Both comparative static effects of the policy parameters and optimal configurations are identified.     

Investing in public investment: an index of public investment efficiency

Pritchett (J Econ Growth 5:361?C384, 2000) convincingly argued that the difference between investment cost and capital value is of first-order empirical importance especially for developing countries where public investment is the primary source of investment. This paper constructs a public investment efficiency index that captures the institutional environment underpinning public investment management across four different stages: project appraisal, selection, implementation, and evaluation. Covering 71 countries, including 40 low-income countries, the index allows for benchmarking across regions and country groups and for nuanced policy-relevant analysis and identification of specific areas where reform efforts could be prioritized. Research applications are outlined.     

Unilateral capital transfers, public investment, and economic growth

We contrast the effects of a transfer tied to investment in public infrastructure from a traditional pure transfer. The latter has no growth or dynamic consequences; it is always welfare improving, the gains increasing with the stock of government debt and the benefits of debt reduction. A tied transfer generates dynamic adjustments, as public capital is accumulated in the recipient economy. Its long-run growth and welfare effects depend upon the initial stock of infrastructure, as well as co-financing arrangements. These contrasts also apply to temporary transfers, particularly the transitional dynamics. A temporary pure transfer has only modest short-run growth effects and leads to a permanent deterioration of the current account, while a productive transfer has significant impacts on short-run growth, leading to permanent improvements in key economic variables including the current account.     

Private labels, price rivalry, and public policy

The article examines (i) why low-quality private labels are introduced in some product categories and not in others, (ii) how the existence of a low-quality private label affects the pricing of a competing national brand, and (iii) how consumers’ surplus and welfare are affected by private labels. We find that the potential for private label introduction may—in return for national brand exclusivity in that particular retail store (exclusive dealing)—lead to price concessions from the producer of the national brand. If the national brand producer decides not to offer an exclusivity contract, a private label is introduced. In this case, private label introduction may lead to higher retail prices on national brands, which can be detrimental to consumer welfare as well as total welfare. We argue that our results have important implications for the interpretation of empirical results and the public policy towards national brands     

Infant mortality,relative income and public policy

Do health outcomes depend on relative income as well as on an individual's absolute level of income? We use infant mortality as a health status indicator and find a significant and positive link between infant mortality and income inequality using cross-national data for 93 countries. Holding constant the income of each of the three poorest quintiles of a country's population, we find that an increase in the income of the upper 20% of the income distribution is associated with higher, not the lower infant mortality. Our results are robust and not just caused by the concave relationship between income and health. The estimates imply a decrease in infant mortality by 1.5% for a one percentage point decrease in the income share of the richest quintile. The overall results are sensitive to public policy: public health care expenditure, educational outcomes, and access to basic sanitation and safe water can explain the inequality–health relationship. Thus, our findings support the hypothesis of public disinvestment in human capital in countries with high income inequality. However, we are not able to determine whether public policy is a confounder or mediator of the relationship between income distribution and health. Relative deprivation caused by the income distance between an individual and the individual's reference group is another possible explanation for a direct effect from income inequality to health.     

The role of public policy in closing foreign direct investment gaps: an empirical analysis

Using public policy instruments to attract Foreign Direct Investment (FDI) has become standard in most countries, irrespective of their level of development, geographical location or industrial structure. Against this background the paper analyses the suitability of various public policies to attract inward FDI based on a sample of 11 countries and 10 industries from the manufacturing sector over 10 years. For this aim we derive an empirical baseline model of the determinants of inward FDI-stock. From this baseline model FDI-gaps—measured as the difference between the “estimated actual” inward FDI-stock and the “potential” FDI-stock, which could be realized if a certain “best practice policy” were carried out—are derived. Thereby the analysis focuses on business taxation, public research and development expenditures, the information and communication infrastructure endowment, labor costs as well as institutional and skill-related policies. The analysis inter alia reveals the share of each of these location factors in the total industry- and country-level FDI-gap. Moreover, the analysis explores how policy advice depends on the definition of the “best practice policy”.     

Giving overseas and public policy

Remarkable numbers of people give to overseas development charities. The aim of this paper is to consider how such overseas giving is best modelled and the implications for public policy. Widely used theories of charitable giving, based on warm-glow or the provision of public goods, provide insight but are not fully satisfactory as explanations of giving for the specific purpose of development. Instead, an “identification” approach to individual giving is proposed here that combines the results focus of the public goods formulation with the scale of the warm-glow model. The theoretical model is used to examine the implications for public policy, including the extent to which official aid crowds out private giving and how public policy should take account of private willingness to make charitable transfers overseas.     

Warranty markets and public policy

Search equilibrium models in the Economics of Information concern themselves exclusively with consumer ignorance of the prices that different firms charge. Legal regulation dealing with information, on the other hand, concerns itself primarily with contact terms. In particular, firms are often required to warrant against product related defects on the supposed ground that firms respond to consumer ignorance only by degrading contract quality. This paper is the beginning of an attempt to make the Economics of Information useful to policymakers. It models a market for warranties under imperfect information and shows that firms are more likely to respond to consumer ignorance by raising prices for the warranties that consumers prefer rather than deleting warranties from consumer contracts. Hence, policymakers should be concerned more with reducing supracompetitive prices than with “improving” contract quality.     

Microfinance institutions and public policy

Many governments and nongovernmental organizations have adopted policies to promote the growth of microfinance institutions (MFIs). The appropriate level and form of support for MFIs are discussed in this paper on the basis of a review of key MFI characteristics. Governments are also responsible for the regulation of MFIs; here, some principles concerning the extent and coverage of MFI regulation and supervision are developed.     

Export rivalry,vertically-related markets,and optimal public ownership policy

This paper considers the optimal public ownership policy of an upstream firm which competes with a foreign private rival. Both firms supply a produced input to the domestic and foreign downstream firms that compete in an export market. The paper shows that complete privatization of the domestic upstream firm is never optimal. It will likely be fully nationalized if its market share is high, the domestic downstream firms' market share is low, and the total number of firms in the downstream is large. Simulation results reveal that the public firm's optimal profit margin may be negative and that the government ownership level may exhibit a reswitching phenomenon as the number of domestic downstream firms keeps growing. The paper sheds light on the possibility of using government ownership policy as a pseudo-trade and industrial policy.     

International aspects of public infrastructure investment

Abstract.  Modelling infrastructure as an international public good in a two‐country model of trade where each country's social planner behaves strategically, we show that, in general, the equilibrium levels of infrastructure are not optimal from a global perspective. Utilizing an appropriate econometric framework and data from 16 European countries over the period 1987–95, we find evidence that is consistent with the predictions of our model. JEL Classification: F10, F42, H42
Aspects internationaux de l'investissement public dans les infrastructures.  Les auteurs présentent un modèle de commerce international entre deux pays dans lequel (1) les planificateurs des deux pays ont un comportement stratégique et (2) les infrastructures sont un bien public international. Ils montrent que, en général, les niveaux d'équilibre des investissements en infrastructure ne sont pas optimaux d'un point de vue global. A l'aide d'un cadre économétrique approprié, et de données pour 16 pays européens entre 1987 et 1995, ils valident les prédictions de leur modèle.     

Economics of externalities and public policy

In this paper we study a particular case of “multiple” externalities associated to the production of a good/activity, whose external effects can change from positive to negative depending on the level of output (intersecting externalities). To analyze their impact on the public policy we propose a very simple two-agent partial equilibrium model in the technological context of externalities. In a static framework, the centralized solution always implies an optimal policy, which may consist of taxation or subsidization depending on the individual optimum and on the technology parameters. In a dynamic model with local knowledge of the efficiency function and instantaneous output adjustments, such an optimal policy can be structurally stable or unstable. In the latter case, under small changes of the parameters the policy may switch from low taxation/subsidization to high taxation/subsidization or vice versa, or even jump discontinuously from taxation to subsidization or vice versa. Furthermore, the decentralized solution based upon “tradable rights” can be economically equivalent to the centralized solution in the form of taxation policy but the two solutions may be not politically equivalent.

Political frictions and public policy outcomes

We study the role of political frictions in public policy outcomes. We propose a simple model of fiscal policy that combines a lack of commitment by the government, political turnover, and another political friction that can be interpreted either as political polarization or as public rent-seeking. We show that political turnover increases public debt levels, while political polarization or public rent-seeking leads to higher public spending. We evaluate the importance of different political frictions for fiscal policy outcomes using a sample of twenty developed countries. We find that the data on political instability combined with the data on public rent-seeking explain 25% of the variation in public debt levels.     

Endogenous public policy and multiple equilibria

One of the well known roles of public policy in models with indeterminacy is to reduce the set of equilibria. However, agents' expectations regarding future policy may be self fulfilling when public policy is endogenized. We show that a simple overlapping generations economy with public education may yield multiple equilibria. Under a laissez-faire system, our model has a unique equilibrium. Thus, the presence of public policy may generate, rather than eliminate, multiple equilibria.     

Growth,convergence and public investment. A Bayesian model averaging approach

The aim of this study is twofold. First, the determinants of economic growth are studied among a wide set of potential variables for the Spanish provinces (NUTS3). Among others, various types of private, public and human capital in the group of growth factors are included. Also, it is analysed whether Spanish provinces have converged in economic terms in recent decades. The second objective is to obtain cross-section and panel data parameter estimates that are robust to model specification. For this purpose, a Bayesian Model Averaging (BMA) approach is used. Bayesian methodology constructs parameter estimates as a weighted average of linear regression estimates for every possible combination of included variables. The weight of each regression estimate is given by the posterior probability of each model.     

The Japanese saving rate between 1960 and 2000: productivity,policy changes,and demographics

In this paper, we use an overlapping generations model to study the factors generating the saving rate in Japan between 1960–2000. The model economy allows for observed aging of the population, total factor productivity (TFP), and fiscal policy to affect the national saving rate. Our calibrated general equilibrium setup generates saving rates that are reasonably similar to the data during this period. Our counterfactual experiments indicate that observed TFP growth rates are the main reason for both the secular decline and the two humps in the saving rate during 1960–2000.      

An investment contest to influence environmental policy

In an investment contest for environmental policy, polluters and victims of pollution invest in an increase of their marginal benefits of pollution and environmental quality, respectively. These investments influence time-consistent environmental policy. Investments will exceed their optimal level. The more victims there are, the lower aggregate investment, the lower payoffs for the victims and the higher payoffs for the polluters. The more polluters there are, the higher aggregate investment and the lower payoffs for polluters and victims. Asymmetries between polluter and victim result in less overinvestment and bias environmental policy in favour of the less productive side.