A simple dynamic decentralized leadership model with private savings and local borrowing regulation

This paper considers a simple dynamic decentralized leadership model with local borrowing and regional productivity-enhancing investment. In this model, the central government is benevolent but cannot commit to ex post intergovernmental transfer policies, while local governments act strategically after accounting for the ex post motives of the central government. We then investigate inefficiency in the subgame perfect equilibrium. We analyze the effect of central control on local borrowing and show that central control is of no benefit because ex ante local taxation works to offset it. We find the model yields different policy implications that central control is effective when extended to the case of residential mobility.     

Government size,democracy, and corruption: An empirical investigation

Previous studies on the effect of government size on corruption have produced mixed results. In an attempt to explain these ambiguous results, this study investigates the effect of government size on corruption by taking into account the role of the democracy in each country. Using annual data of 82 countries between 1995 and 2008, the estimation results indicate that an increase in government size can lead to a decrease in corruption if the democracy level is sufficiently high and, in contrast, can lead to an increase in corruption if it is too low. As robustness checks, the estimations using a different index of corruption and a different proxy for government size are also conducted. The results reveal that our main findings are robust. Furthermore, to address endogeneity problems, we conduct the instrumental variables estimation and the system generalized method of moments estimation, the results of which also support our primary findings. These results provide some important implications for policymakers seeking to perform government interventions without aggravating corruption.     

Information Acquisition and Government Interventon in Credit Markets

Market failure in the financing of risky projects is studied. Project risk includes idiosyncratic and aggregate components. Banks can investigate aggregate risk and can evaluate the idiosyncratic risk of each entrepreneur. They engage in Bertrand competition for entrepreneurs using interest rates. Information obtained by a bank on aggregate risk is fully revealed, and that on entrepreneur-specific risk is partly revealed. Banks will not investigate aggregate risk and will evaluate entrepreneurs too intensively. Efficiency can be improved by public acquisition of information on industry risk and by loan guarantees partially covering losses on projects that fail.     

The Effects of Technology Changes on Sectoral Trade Patterns*

We develop a model in which sectoral trade patterns depend on both the technology common to all sectors and the technologies specific to each sector. Changes in the common technology level affect sectoral trade patterns through their impact on intertemporal optimization behavior, while changes in the sector‐specific technology levels affect sectoral trade patterns by influencing comparative advantage. The model shows: (1) unexpected increases in the common technology level worsen sectoral trade balances, but expected increases in the common technology level improve them; and (2) given other countries’ sectoral technology levels, an increase in a sector‐specific technology level relative to other sectors improves sectoral trade balances through its operation on comparative advantage. Using Japanese data, the empirical results reported in this paper support the model’s predictions.     

Too big or too small? A synthetic view of the commitment problem of interregional transfers

There is a growing body of literature on the commitment problem of interregional transfers. The problem occurs because of an ex post bailout by a central government leading to ex ante adverse incentive consequences for a local government. However, different models have yielded different economic consequences. The local government may be too large, overspending and/or overborrowing, or it may be too small, raising less of its own revenue. In the presence of interregional spillovers, the equilibrium may yield a Pareto-efficient outcome. The present paper aims to synthesize these models, developing a simple decentralized leadership model. A critical question concerns what decision is made ex ante by the local government—namely public expenditure or tax collection—with the remaining policy instrument being residual adjusted by ex post transfers. We discuss how different scenarios affect the equilibrium outcome.     

A Simple Model of Contract Enforcement Institutions

We demonstrate that in highly productive economies contract enforcement institutions are endogenously established, and partnership contracts correct inefficient land allocation. In less productive economies, however, such institutions are not established, and partnership contracts are not formed. In economies with intermediate productivity levels, multiple Nash equilibria exist; that is, contract enforcement institutions are established in the high Nash equilibrium whereas they are not formed in the low Nash equilibrium. In this case, institutional quality can be diverse across economies. We also prove that improvement in institutional quality reduces within‐country inequality. All these outcomes are consistent with cross‐country observations.     

The Optimality of Punishing Only the Innocent: The Case of Tax Evasion

We study the effectson tax enforcement and tax policy of unintentional complianceerrors by taxpayers and administrative errors by tax auditors.The government can impose both penalties for misreporting andrewards for honest reporting. Maximal sanctions will not be appliedbecause errors are possible, so evasion cannot be eliminatedcostlessly. Under optimal policy intentional evasion can be deterred,but innocent tax evaders must be penalized whether they haveunintentionally evaded or have been mistakenly convicted. Thisdeters intentional evasion, but limits redistribution. Withoutrewards for honest reporting, the revelation principle need notapply, so intentional evasion can occur.     

VAT and the taxation of rents

Cash-flow corporate taxes can tax corporate-source rents and avoid some of the distortions on investment and financing caused by conventional corporate taxes. However, cash-flow taxes applied on an origin basis are prone to international profit-shifting, which can lead to a competitive reduction in tax rates. While this can be avoided by a destination-based cash-flow tax, most countries have opted for origin-based taxation, asserting the right to tax rents generated within their jurisdictions. Since a value-added tax (VAT) implicitly includes rents in its base, it can complement origin-based corporate taxation. We compare and contrast the use of destination and origin VATs as complements to an origin-based cash-flow corporate tax.     

Revisiting the Böhm-Bawerk–Edgeworth Controversy: Early Neoclassical Economists and Labour Exchange

This article revisits the controversy between Böhm-Bawerk and Edgeworth. The crux of this debate revolving around value and cost lay in their views on labour exchange. Böhm-Bawerk and Edgeworth did not disagree on the basic principles underlying the causality between labour exchange and value-cost. Böhm-Bawerk stressed a decisive influence of social power relationships on labour time and Edgeworth apparently agreed. Böhm-Bawerk’s and Edgeworth’s observations on actual industrial relations and their theoretical arguments informing the controversy had variances. Such observation–theory discrepancies also appeared in their other work and were shared by other early neoclassical economists. Their efforts, with this contradiction, contributed to the moulding of a principle that de-individuates labour exchange. At the root of this process lay the fact that, despite their subjectivist approach, they failed to comprehend the distinctiveness of capitalistic labour exchange arising from worker subjectivity towards labour performance and employer countermeasures. The Böhm-Bawerk–Edgeworth controversy typically illustrates this crucial moment for the establishment of the neoclassical paradigm.