Dancing to the Donors' Tune? Policy Choice in Aid‐Dependent Countries

Current aid rhetoric emphasizes the selective allocation of otherwise unconditional funds in support of the recipients' own plans, in contrast to the old donor practice of bundling money and policies. I show that when recipients have private information, policies reflecting their preferences and knowledge might result in such a regime. However, generous transfers can also induce them to conform to the outcome‐oriented expectations of donors at the expense of lower aid impact. Such behaviour is consistent with an abundance of case‐study evidence. Moderate disagreements over what the optimal policy is could actually produce better results. Certain forms of both donor competition and coordination might also eliminate this distortion, while a donor concern for need only removes incentives for aid‐seeking in the least needy countries. In summary, optimal aid policies are highly context‐specific, and donors should thus concentrate their efforts to practise more informed selectivity.     

DETERMINANTS OF SOVEREIGN BONDS RATINGS: A ROBUSTNESS ANALYSIS

Several studies have attempted to deduce the determinants of sovereign bond ratings. In this study, Extreme Bounds Analysis is applied to approximately 30 factors proposed by the literature in order to assess their robustness with a focus on the relative importance that economic and political variables receive in the shaping of the ratings. We find that policies that constrain the public sector are among the most robust. Variables such as rule of law, openness to economic flows, central bank independence, and market friendly policies are found to be more robustly correlated with the ratings than foreign reserves, fiscal deficit, sovereign bond yields, and economic growth.     

The stained China miracle: Corruption,regulation, and firm performance

Regional corruptness in China has a positive effect on the profitability of private firms, but not that of state-owned firms. A natural experiment of exogenous trade policy change suggests that corruption may help private firms circumvent government regulation.     

Aggregation of the generalized fractional processes

The paper studies the interaction between aggregation and persistence pertaining to skip sampling of stock variables as well as temporal aggregation of flow variables for the generalized fractional processes. We show that, for skip sampling, the long memory feature at the zero frequency can arise from the aggregation of a generalized fractional series, while temporal aggregation does not induce such phenomenon. Simulation results are included to demonstrate the practical relevance of the theoretical results.     

Lumpy Investment and Corporate Tax Policy

In the presence of both convex and nonconvex capital adjustment costs in a dynamic general equilibrium model, corporate tax policy generates both intensive and extensive margin effects via the channel of marginal Q. Its impact is determined largely by the strength of the extensive margin effect, which, in turn, depends on the cross‐sectional distribution of firms. Depending on the initial distribution of firms, the economy displays asymmetric responses to tax changes. Moreover, an anticipated increase in the future investment tax credit reduces investment and adjustment rate initially.     

Capital Controls,Global Liquidity Traps,and the International Policy Trilemma*

The zero bound on interest rates introduces a new dimension to the trilemma in international policy. The openness of the international financial market might render monetary policy ineffective, even within a system of fully flexible exchange rates, because shocks that lead to a liquidity trap in one country are propagated through financial markets to other countries. However, the effectiveness of monetary policy can be restored by the imposition of capital controls. We derive the optimal response of monetary policy to a global liquidity trap in the presence of capital controls. We show that, even though capital controls might facilitate effective monetary policy, capital controls are not generally desirable in terms of welfare.     

Location and ownership of public goods

We introduce location choice for the public good in the property rights framework. We find that it can be optimal to separate location from ownership.     

Direct Democracy and Local Public Finances under Cooperative Federalism

In this paper, we exploit the introduction of the right of local initiatives in the German state of Bavaria in 1995 in order to study the fiscal effects of direct democracy. Our identification strategy combines difference‐in‐differences and regression discontinuity methods: we compare municipal expenditure and revenue between pre‐ and post‐reform periods at population thresholds where the signatures needed to launch initiatives and minimum quorum requirements decrease discontinuously (difference‐in‐discontinuities design). The results suggest that stronger direct democratic institutions lead to an expansion of local government size.     

Firm-level determinants of tax evasion in transition economies

Business tax evasion is an important issue for governments. Yet the factors that determine business tax evasion have not been sufficiently examined in the literature in general, and in transition contexts in particular. To address this gap, this study uses the WB/EBRD Business Environment and Enterprise Performance Survey (BEEPS) database with a sample of over 12,692 firms from 26 transition economies. Applying various modelling strategies, we argue that tax evasion is a function of firm-level and institutional-level variables. We contribute to the literature by providing robust evidence showing that the perceived tax burden has a positive impact on tax evasion. We also find that the tax evasive behaviour of firms is positively influenced by low trust in government and in the judicial system as well as by higher perceptions of corruption and higher compliance costs. We find that smaller firms, individual businesses and firms in sectors that are less visible to the tax administration are more likely to get involved in evasive behaviour. Overall, institutional factors play an important role in determining firms’ tax evasion behaviour in transition economies. This finding has important policy implications.     

REGULATION STRATEGIES FOR THE PROVISION OF PATERNALISTIC GOODS

In this study, we analyze the regulation of markets for the provision of services whose costs are subsidized for paternalistic reasons. We model the choice of a benevolent regulator who wants to maximize consumer welfare in a setting where quality cannot be verified and the good provided is fully subsidized. The choice is thus made between two types of providers (profit maximizers and altruistic providers) and two frameworks (monopoly franchise and quality competition). Our analysis shows that in this environment the performance of mixed markets is always dominated by pure forms. Moreover, although making efficient providers compete for the market minimizes cost, the choice of quality competition with altruistic providers may be preferable from a welfare point of view whenever service quality is relevant and the productivity differential is not substantial.