Public Interest
Women Prefer Larger Governments: Growth, Structural Transformation, and Government Size
Tiago Cavalcanti & José Tavares
Economic Inquiry, January 2011, Pages 155-171
Abstract:
The increase in income per capita is accompanied, in virtually all countries, by two changes in economic structure: the increase in the share of government spending in gross domestic product (GDP), and the increase in female labor force participation. We argue that these two changes are causally related. We develop a growth model based on Galor and Weil (1996) where female participation in market activities, fertility, and government size, in addition to consumption and saving, is endogenously determined. Rising incomes lead to a rise in female labor force participation as the opportunity cost of staying at home and caring for the children increases. In our model, higher government spending decreases the cost of performing household chores, including, but not limited to, child rearing and child care, as in Rosen (1996). We also use a wide cross-section of data for developed and developing countries and show that higher market participation by women is positively and robustly associated with government size. We then investigate the causal link between participation and government size using a novel unique data set that allows the use of the relative price of productive home appliances as an instrumental variable. We find strong evidence of a causal link between female market participation and government size. This effect is robust to the country sample, time period, and a set of controls in the spirit of Rodrik (1998).
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Historical Trust Levels Predict the Current Size of the Welfare State
Andreas Bergh & Christian Bjørnskov
Kyklos, February 2011, Pages 1-19
Abstract:
Despite the fact that large welfare states are vulnerable to free-riding, the idea that universal welfare states lead to higher trust levels in the population has received some attention and support among political scientists recently. This paper argues that the opposite direction of causality is more plausible, i.e. that populations with higher trust levels are more prone to creating and successfully maintaining universal welfare states with high levels of taxation where publicly financed social insurance schemes. The hypothesis is tested using instrumental variable techniques to infer variations in trust levels that pre-date current welfare states, and then using the variation in historical trust levels to explain the current size and design of the welfare state, and finally comparing the explanatory power of trust to other potential explanatory factors such as left-right ideology and economic openness. To infer variation about historical trust levels, we use three instruments, all used previously in the trust literature: the grammatical rule allowing pronoun-drop, average temperature in the coldest month and a dummy for constitutional monarchies. Using cross-sectional data for 77 countries, we show that these instruments are valid and that countries with higher historical trust levels have significantly higher public expenditure as a share of GDP and also have more regulatory freedom. This finding is robust to controlling for several other potential explanations of welfare state size.
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Disentangling Accountability and Competence in Elections: Evidence from U.S. Term Limits
James Alt, Ethan Bueno de Mesquita & Shanna Rose
Journal of Politics, January 2011, Pages 171-186
Abstract:
We exploit variation in U.S. gubernatorial term limits across states and time to empirically estimate two separate effects of elections on government performance. Holding tenure in office constant, differences in performance by reelection-eligible and term-limited incumbents identify an accountability effect: reelection-eligible governors have greater incentives to exert costly effort on behalf of voters. Holding term-limit status constant, differences in performance by incumbents in different terms identify a competence effect: later-term incumbents are more likely to be competent both because they have survived reelection and because they have experience in office. We show that economic growth is higher and taxes, spending, and borrowing costs are lower under reelection-eligible incumbents than under term-limited incumbents (accountability), and under reelected incumbents than under first-term incumbents (competence), all else equal. In addition to improving our understanding of the role of elections in representative democracy, these findings resolve an empirical puzzle about the disappearance of the effect of term limits on gubernatorial performance over time.
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The Distribution of Wealth and Fiscal Policy in Economies With Finitely Lived Agents
Jess Benhabib, Alberto Bisin & Shenghao Zhu
Econometrica, January 2011, Pages 123-157
Abstract:
We study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and intergenerational transmission of wealth. Financial markets are incomplete, exposing agents to both labor and capital income risk. We show that the stationary wealth distribution is a Pareto distribution in the right tail and that it is capital income risk, rather than labor income, that drives the properties of the right tail of the wealth distribution. We also study analytically the dependence of the distribution of wealth - of wealth inequality in particular - on various fiscal policy instruments like capital income taxes and estate taxes, and on different degrees of social mobility. We show that capital income and estate taxes can significantly reduce wealth inequality, as do institutions favoring social mobility. Finally, we calibrate the economy to match the Lorenz curve of the wealth distribution of the U.S. economy.
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Civil Society and the State: The Interplay Between Cooperation and Minimum Wage Regulation
Philippe Aghion, Yann Algan & Pierre Cahuc
Journal of the European Economic Association, February 2011, Pages 3-42
Abstract:
In a cross-section of countries, state regulation of labor markets is negatively correlated with the quality of labor relations. In this paper, we argue that these facts reflect different ways of regulating labor markets, either through the state or through the civil society, depending on the degree of cooperation in the economy. We rationalize these facts with a model of learning of the quality of labor relations. Distrustful labor relations lead to low unionization and high demand for direct state regulation of wages. In turn, state regulation crowds out the possibility for workers to experiment negotiation and learn about the potential cooperative nature of labor relations. This crowding out effect can give rise to multiple equilibria: a "good" equilibrium characterized by cooperative labor relations and high union density, leading to low state regulation; and a "bad" equilibrium, characterized by distrustful labor relations, low union density, and strong state regulation of the minimum wage.
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Consumer Spending and the Economic Stimulus Payments of 2008
Jonathan Parker et al.
NBER Working Paper, January 2011
Abstract:
We measure the response of household spending to the economic stimulus payments (ESPs) disbursed in mid-2008, using special questions added to the Consumer Expenditure Survey and variation arising from the randomized timing of when the payments were disbursed. We find that, on average, households spent about 12-30% (depending on the specification) of their stimulus payments on non-durable expenditures during the three-month period in which the payments were received. Further, there was also a significant increase in spending on durable goods, in particular vehicles, bringing the average total spending response to about 50-90% of the payments. Relative to research on the 2001 tax rebates, these spending responses are estimated with greater precision using the randomized timing variation. The estimated responses are substantial and significant for older, lower-income, and home-owning households. We further extend the literature in two ways. First, we find little evidence that the propensity to spend varies with the method of disbursement (paper check versus electronic transfer). Second, we evaluate a complementary methodology for quantifying the impact of tax cuts, which asks consumers to self-report whether they spent their tax cuts. The response of spending to the ESPs is indeed largest for self-reported spenders. However, self-reported savers also spent a significant fraction of the payments.
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More than a Caretaker: The Economic Policy of Gerald R. Ford
Andrew Moran
Presidential Studies Quarterly, March 2011, Pages 39-63
Abstract:
This essay examines the reaction of the Gerald Ford administration to the deepening recession of the mid-1970s and the unprecedented challenges of stagflation. This includes an analysis of the decision-making process within the White House, the administration's relationship with Congress, and the abandonment of almost 40 years of Keynesian orthodoxy that would see President Ford introduce a new conservative economic agenda as he sought to adapt traditional Republican economics to deal with new economic circumstances. In short, I argue that Ford was far more than the "accidental" or "caretaker" president that popular history recalls.
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Cybelle Fox
American Journal of Sociology, September 2010, Pages 453-502
Abstract:
Using a data set of public and private relief spending for 295 cities, this article examines the racial and ethnic patterning of social welfare provision in the United States in 1929. On the eve of the Depression, cities with more blacks or Mexicans spent the least on social assistance and relied more heavily on private money to fund their programs. Cities with more European immigrants spent the most on relief and relied more heavily on public funding. Distinct political systems, labor market relations, and racial ideologies about each group's proclivity to use relief best explain relief spending differences across cities.
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Fighting Income Tax Evasion with Positive Rewards
Cécile Bazart & Michael Pickhardt
Public Finance Review, January 2011, Pages 124-149
Abstract:
This article provides experimental evidence regarding the influence of positive rewards on income tax evasion behavior. In particular, the authors experimentally test the impact of positive rewards in the form of individual lottery winnings for fully compliant taxpayers. Among other things, the authors find that these positive rewards lead to a higher rate of tax compliance. Moreover, there are two gender effects. Males not only evade taxes to a much higher extent than females they also show a stronger positive response to the lottery scheme. This allows us to draw some interesting policy recommendations on the efficient use of rewards as a complement of deterrence policies for fighting tax evasion.
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The Effect of Legalized Gambling on State Government Revenue
Douglas Walker & John Jackson
Contemporary Economic Policy, January 2011, Pages 101-114
Abstract:
Legalized gambling is an attractive option to state governments facing tightening fiscal constraints. Yet, the empirical evidence on the effect of gambling on state revenues is limited. Most studies examine a single industry in a single state, and for a relatively short period of time. This study provides a more general analysis of gambling industries and their effects on state revenues. We use data on gambling volume and state government revenues net of federal government transfers for all 50 states from 1985 to 2000. We find that lotteries and horse racing tend to increase state revenues, while casinos and greyhound racing tend to decrease state revenues.
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A Prize To Give For: An Experiment on Public Good Funding Mechanisms
Luca Corazzini, Marco Faravelli & Luca Stanca
Economic Journal, September 2010, Pages 944-967
Abstract:
This article investigates fund-raising mechanisms based on a prize as a way to overcome free riding in the private provision of public goods. We focus on an environment characterised by income heterogeneity and incomplete information about income levels. Our analysis compares experimentally the performance of a lottery, an all-pay auction and a benchmark voluntary contribution mechanism. We find that prize-based mechanisms perform better than voluntary contribution in terms of public good provision. Contrary to the theoretical predictions, contributions are significantly higher in the lottery than in the all-pay auction, both overall and by individual income types.
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The Buck Stops Where? The Distribution of Agricultural Subsidies
Barry Goodwin, Ashok Mishra & François Ortalo-Magné
NBER Working Paper, January 2011
Abstract:
The U.S. has a long history of providing generous support for the agricultural sector. A recent omnibus package of farm legislation, the 2008 Farm Bill (P.L. 110-246) will provide in excess of $284 billion in financial support to U.S. agriculture over the 2008-2012 period. Commodity program payments account for $43.3 billion of this total. Our paper is concerned with the distribution of these benefits. Farm subsidies make agricultural production more profitable by increasing and stabilizing farm prices and incomes. If these benefits are expected to persist, farm land values should capture the subsidy benefits. We use a large sample of individual farm land values to investigate the extent of this capitalization of benefits. Our results confirm that subsidies have a very significant impact on farm land values and thus suggest that landowners are the real benefactors of farm programs. As land is exchanged, new owners will pay prices that reflect these benefits, leaving the benefits of farm programs in the hands of former owners that may be exiting production. Approximately 45% of U.S. farmland is operated by someone other than the owner. We report evidence that owners benefit not only from capital gains but also from lease rates which incorporate a significant portion of agricultural payments even if the farm legislation mandates that benefits must be allocated to producers. Finally, we examine rental agreements for farmers that rent land on both a cash and share basis. We find evidence that farm programs that are meant to stabilize farm prices provide a valuable insurance benefit.
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A Strategic Theory of Policy Diffusion via Intergovernmental Competition
Brady Baybeck, William Berry & David Siegel
Journal of Politics, January 2011, Pages 232-247
Abstract:
Scholars have hypothesized that policy choices by national, state, and local governments often have implications for "location choices" made by residents (e.g., tax policies affect where firms set up business, welfare benefits influence where the poor live, government restaurant smoking restrictions influence where people eat). We develop a spatially explicit strategic theory of policy diffusion driven by intergovernmental competition over residents' location choices. The theory assumes that governments' decisions constitute a strategic game in which governments are influenced by their neighbors. We suggest a variety of policy contexts in which the theory is applicable. For one such context - the adoption of lotteries by American states - we use the theory to generate several hypotheses and then test them using event history analysis. The results provide substantial support for the theory and indicate that states compete for lottery business in a much more sophisticated fashion than has been previously recognized.
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Who Benefits from Child Benefit?
Laura Blow, Ian Walker & Yu Zhu
Economic Inquiry, forthcoming
Abstract:
Governments, over much of the developed world, make significant financial transfers to parents with dependent children. For example, in the United States the recently introduced Child Tax Credit (CTC), which goes to almost all children, costs almost $1 billion each week, or about 0.4% of GNP. The United Kingdom has even more generous transfers and spends an average of about $30 a week on each of about 8 million children - about 1% of GNP. The typical rationale given for these transfers is that they are good for our children and here we investigate the effect of such transfers on household spending patterns. In the United Kingdom such transfers, known as Child Benefit (CB), have been simple lump sum universal payments for a continuous period of more than 20 years. We do indeed find that CB is spent differently from other income - paradoxically, it appears to be spent disproportionately on adult-assignable goods. In fact, we estimate that as much as half of a marginal dollar of CB is spent on alcohol. We resolve this puzzle by showing that the effect is confined to unanticipated variation in CB so we infer that parents are sufficiently altruistic toward their children that they completely insure them against shocks.
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Mega-events: Is Baylor Football to Waco what the Super Bowl is to Houston?
Dennis Coates & Craig Depken
Journal of Sports Economics, forthcoming
Abstract:
Using monthly data describing 23 cities in Texas from January, 1990, through December, 2008, the net impacts of various professional and collegiate sporting events on sales tax revenues are estimated. Contrary to the rhetoric offered by those who argue in favor of public subsidies to host professional sports franchises and mega-events, the authors find that regular season and many postseason games actually correspond with net decreases in economic activity in the host city, from which we infer that a professional sports franchise generates considerable substitution effects for the local population. The authors find that college football games have a positive impact on local host-city tax revenues and that the relative impact of a season of college football might be roughly equivalent to the relative impact of the Super Bowl.
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What Goes Around Comes Around? Experimental Evidence of the Effect of Rewards on Tax Compliance
Barbara Kastlunger, Stephan Muehlbacher, Erich Kirchler & Luigi Mittone
Public Finance Review, January 2011, Pages 150-167
Abstract:
The current experimental study examined the effect of monetary rewards on tax compliance. Eighty-six participants were randomly assigned to one control and two reward conditions (low vs. high reward). Overall, tax compliance was not affected by the rewards. However, a change in compliance strategies was observed. It seems that rewards provoked an all-or-nothing behavior. Whereas in the reward conditions, participants were either completely honest or evaded all of their income, in the control condition, the amount of evasion varied more strongly. Furthermore, audited compliant taxpayers who are rewarded evaded less in the following period compared with audited compliant taxpayers who experienced no rewards.