Reelection,growth and public debt

In this work we examine how economic growth affects public debt when interacted with reelection prospects. Reelection considerations shorten political time horizons and give rise to political myopia that exacerbates debt accumulation. That laxer institutional reelection restrictions (e.g., no term limits) mitigate this effect due to electoral accountability is well known. Incorporating growth, we find that this mitigation can be reversed because less myopic, and more accountable, incumbents put more emphasis on smoothing the effects of growth across generations. We test these predictions using an annual-based panel of U.S. states over the period 1963–2010. Our identification strategy rests on constitutionally-entrenched differences in gubernatorial term limits that provide plausibly exogenous variation in reelection prospects, and aggregate national TFP shocks that are exogenous to individual states. Our estimates indicate that when reelection is possible a one standard deviation positive income shock induces, within the same year, a relative increase of approximately $40 in real per capita public debt.     

Government size,composition of public spending and economic growth in Brazil

The performance of the fiscal policy is largely affected by the relationship between government size, composition of public spending and economic growth. We use a theoretical framework to find optimal relations among these variables and confront them with a panel data for the Brazilian states. Private capital and government spending are substitute inputs in production as the Brazilian states require provision of public spending to fill gaps in the underdeveloped private sector. Public investment and current government expenditures are combined in fixed ratios in the overall government spending due to strong rigidity of the public budget. The optimal share of public investment is considerably lower than current expenditures, as occurs in developing countries characterized by low economic dynamism. Finally, the average tax burden from the data is below the estimated optimal level, meaning that there is space for increasing tax rate without harming economic growth for some Brazilian states.     

Macroeconomic implications of modeling the Internal Revenue Code in a heterogeneous-agent framework

Tax policy analysis in heterogeneous-agent models typically involves the use of smooth tax functions to approximate complex present tax law and proposed reforms. In this paper, we explore the extent to which the tax detail omitted under this conventional approach has macroeconomic implications relevant for policy analysis. To do this, we develop an alternative approach by embedding an internal tax calculator into a large-scale overlapping generations model that, while conditioning on idiosyncratic household characteristics, explicitly models key provisions in the Internal Revenue Code applied to labor income. We find that for a debt-constant steady state analysis of a given tax policy change, both approaches generate similar policy-induced patterns of macroeconomic activity despite variation in the underlying patterns of household tax-preferred consumption and labor supply behavior. However, this variation in underlying behavior is associated with significant quantitative and qualitative differences in macroeconomic aggregates along a debt-financed transition path immediately following a policy change. Consequentially, although the use of unconditional smooth tax functions may be a reasonable modeling simplification for steady state analysis of tax policy, caution should be taken for their use in transition path analysis within heterogeneous-agent models.     

INFRASTRUCTURE PROVISION,POLITICS AND RELIGION: INSIGHTS FROM TUNISIA'S NEW DEMOCRACY

This paper analyzes the relationship between access to infrastructure services and support for religious parties based on the evidence produced by a recent democratic experience in Tunisia in which a religious political party, Ennahdha, governed from 2011 to 2014. The experience points to a complex relationship. In the 2011 election, areas with higher access are associated with higher support for Ennahdha than areas with lower access. In the 2014 election, however, infrastructure access is positively correlated with support for the party in areas where access had improved but negatively correlated with support for the party in areas that already had high access. A possible pragmatic general implication is that, to be politically competitive, religious parties, cannot bet solely on their religious commitment to provide basic services, including infrastructure, to the poor. They need to recognize the multiplicity of voter's concerns and their evolving agenda.     

Optimal social security tax with myopic agents

Myopic agents lack the foresight to save for their own old age. It is generally believed that correcting myopia is a rationale for a pay-as-you-go (PAYG) pension system. This view has been supported by existing literature showing that the optimal PAYG social security tax should increase when people are more myopic. In this paper we obtain new results opposed to the traditional view. By establishing a very standard general equilibrium OLG model with myopic agents and endogenized marginal product of capital, we show that the optimal social security tax should be lower when people are more myopic. Our numerical analysis also shows that the welfare cost of the social security tax increases with people's degree of myopia. These results suggest that correcting myopia is not a clear rationale for the PAYG social security.     

Political competition,tax salience and accountability. Theory and evidence from Italy

This paper argues that electoral competition may hinder rather than foster political accountability, especially when elected officers can choose among a number of tax instruments. We develop a political agency model showing that politicians in more competitive jurisdictions use less salient tax instruments more intensely. Defining salience as visibility or, analogously, as voters' awareness of the costs associated with specific government revenue sources, we argue that voters are less likely to hold politicians to account for the associated tax burden of a less salient instrument. This in turn implies that strategic politicians will more heavily rely on less salient revenue sources when electoral competition is stronger. Using data on Italian municipal elections and taxes over a 10-year period, we determine the degree of salience of various tax instruments, including property taxes (high salience) and government fees for official documents (low salience). We then show that mayors facing stronger competition for re-election use less salient tax instruments more intensely.     

Search efficiency,wage dynamics and welfare

Advances in information technology have improved the job-search process in the labor market. We analyze the effects of this improvement by constructing a search-and-matching model with two sectors: a risky sector with firm-specific productivity shocks and a risk-free sector. The risky sector is characterized by a low level of commitment between employers and workers – either party can end the employment relationship. We show that a better job-search process generates more job matches in the risky sector, and this benefits workers by improving their outside options. The effect on employers is subtle: while it is easier to fill vacancies, workers become more expensive. At the same time, the ease of finding new workers makes it harder for employers to keep their wage promises to workers and increases wage volatility. Our paper contributes to the literature by offering a novel explanation for the observed rise in wage volatility.     

The evolution of corruption and development in transitional economies: Evidence from China

It is widely accepted in the literature, that the level of corruption is negatively and robustly related to economic development. However, skeptics argue that for transitional economies, this relationship may not hold. Economic reform loosens up the control of local officials and can increase corruption; Corruption and per capita income can be positively related. Using panel provincial data of China from 1995 to 2014 on prosecuted cases of corruption, we discover that during the early phase of China’s economic reform (during Zhu Rongji and Hu-Wen administrations), a positive short-run relationship is indeed observed. But, there is a robust negative long-run cointegration relationship between corruption and per capita income. The development of the market economy improves private wage and income in the long-run. The relatively inefficient and low returns to ordinary corruption cannot compete with rising market returns, which lead to dwindling corruption. However, the share of major corruption cases is increasing over time to be able to compete with rising market wages.     

Fiscal decentralization and government size: The role of democracy

This paper examines how the level of democracy in a country affects the relationship between fiscal decentralization and government size. We argue that political regimes, proxied by their democracy levels, are important for different decentralization theories to predict the impact of fiscal decentralization on government size. We test this argument using panel data from 76 developed and developing countries during 1972–2013. We find strong and robust evidence that fiscal decentralization is negatively associated with government size and that a higher level of democracy tends to mitigate the negative impact of fiscal decentralization. Therefore, our study contributes to the literature by offering a novel insight on mixed results regarding the relationship between fiscal decentralization and government size in the literature.     

Tax-benefit systems and differences in aggregate labour force participation: Comparative evidence from the Czech Republic and Hungary

This paper investigates the extent to which cross-country differences in aggregate participation rates can be explained by differences in tax-benefit systems. We take the example of two countries, the Czech Republic and Hungary, which – despite a lot of similarities – differ markedly in labour force participation rates. Using comparable individual-level labour supply estimates, we simulate how the aggregate participation rate would change in one country if the other country’s tax and social welfare system were adopted. The estimation results for the two countries are quite similar, suggesting that individual preferences are essentially identical in the two countries. The simulation results show that about one-third of the difference in the participation rates of the 15–74 year-old population and more than two-thirds of the participation of the prime-age population can be explained by differences in the tax-benefit systems.