Do fiscal decentralization and income inequality affect the size of the shadow economy? A panel data analysis for OECD countries

In this article, we study fiscal decentralization and inequality as driving forces of the shadow economy in advanced economies. Our empirical analysis suggests that a reduction in income inequality will contain the shadow economy, whereas expenditure and tax decentralization do not significantly impact it. As decentralization is generally believed to increase government efficiency, this result is indicative of already highly efficient public administrations. Our results further indicate that redistributive policies positively affect the size of the shadow economy, whereas the tax burden does not have any discernible effect on the shadow economy in our sample.     

From ability to pay to concepts of equal sacrifice

The ability-to-pay approach to taxation in Mill's tradition is given a rigorous treatment in a social choice theoretic framework. Generalized concepts of equal sacrifice are axiomatized making explicit use of the ability-to-pay principle. Extensive statements on progressivity are derived. However, there is no such axiomatized concept that implies non-excessive progressitivity irrespective of taxpayers' utility function.     

Internalizing intergenerational externalities by regionalization

The emission of long-lived pollutants and public debt policies are related by the joint problem of intergenerational externalities. This paper examines both phenomena from the local perspective, in a model with interregional household mobility. We conclude that local environmental agencies have incentives to internalize all intergenerational pollution externalities, provided all rents of immobile production factors, including waste emissions, are appropriated by the regions. Contrary to widespread belief, however, neutrality of local public debt is not guaranteed in general. Shifts in the intertemporal pattern of local taxes change the net wealth of local property owners if distortionary residence-based taxes are imposed to service the local debt.     

Optimal management of an ecosystem with an unknown threshold

We consider an ecosystem with two distinct equations of motion that are separated by a threshold value of the state variable. We find that increasing uncertainty (both uncertainty embedded in the natural system and uncertainty of the decisionmaker about the location of the threshold) can lead to nonmonotonic changes in precaution: a reduction in uncertainty can first increase and then decrease optimal precautionary activity. This nonmonotonicity can help to explain why regulators often give conflicting arguments about optimal abatement policies in the face of uncertainty. For example, some regulators argue for an immediate reduction in pollutant loading until uncertainty about the underlying process is reduced while others call for no costly reductions in pollutant loading until the same uncertainty is reduced. These statements can be consistent even if both sides agree on both economic objectives and the system dynamics, but have different priors on the uncertainty involved.     

Fisheries Management Under Cyclical Population Dynamics

Cycles in environmental conditions (e.g., sea-surface temperature) directly impact fish growth. This paper extends the classical Gordon-Schaefer fishery model by replacing the constant growth rate with a cyclical growth rate. The optimal harvest rate is shown to fluctuate, but the cycle of the harvest rate lags the cycle of the biological growth function with the highest harvest rate occurring after biological conditions start to decline. Simulations contrast various fishing policies and illustrate the proclivity to crash a fishery if it is wrongfully managed as if there is a constant growth rate with i.i.d. environmental shocks. Finally, we show that small cyclical fluctuations in one species can result in large fluctuations in the optimal harvest rate of another species if the fish species are interlinked through predator-prey relationships.      

Dynamic portfolio choice with deferred annuities

We derive the optimal life-cycle portfolio choice and consumption pattern for households facing uncertain labor income, risky capital market, and mortality risk. In addition to stocks and bonds, the households have access to deferred annuities. Deferred payout life annuities are financial contracts providing life-long income to the annuitant after a specified period of time conditional on survival. We find that deferred annuities play an important role in household portfolios and generate significant welfare gains. Households with high benefits from state pensions, moderate risk aversion and moderate labor income risk purchase deferred annuities from age 40 and gradually increase their portfolio share. At retirement, deferred annuities account for 78% of total financial wealth. Households with low state pensions and high labor income risk purchase more annuities and earlier. Uncertainty with respect to future mortality rates has the same effect, i.e. household hedge against longevity risks using deferred annuities.     

Monetary Policy Rules for a Small Open Economy

In this paper, the optimal choice of a monetary target is investigated for a small open economy that is subject to foreign monetary policy shocks. In contrast to large parts of the literature, pegging the exchange rate is never the best policy choice for the small open economy in our model. Instead, monetary targeting and, depending on the parameter combination, producer price index targeting come closest to the optimal policy rule in terms of welfare. Generally, the welfare performance of the simple targeting rules under consideration hinge critically on the degree of pass-through in the home economy and in the rest of the world.