Policy making in the European Monetary Union
Enrico Colombatto
It is well known that the European Union is far from being an optimum currency area. The introduction of the Euro is in fact a political issue, which may indeed be analyzed in a public-choice perspective. In this light, this paper argues that by transferring monetary sovereignty to a federal authority, national policy makers try to protect their rent-seeking prerogatives. In the short run, the nature of political and bureaucratic rent-seeking is however likely to change, especially in the so-called "weak" countries, where policy-making will be less concerned with taxation, and more with spending federal funds. In the long run, as the gap between payments and receipts for each EU country shrinks, tensions are likely to come to the surface again. Keeping EMU together in the future will therefore be a much more challenging task than creating it.
Impartiality, equality and utilitarianism with a human face
Marco Mariotti
Egalitarianism presents the problem of baseline-dependence: egalitarianism from where? I argue that (some) utilitarian choices provide a compromise between the desire to achieve equality and the need to avoid arbitrary judgments in the choice of a baseline. Using a standard criterion of inequality-aversion, Lorenz dominance, I show that the Lorenz-undominated utilitarian choices are exactly those which implement this compromise. Finally, I also show that the entire set of utilitarian choices is characterised instead by the weaker impartiality criterion called Suppes-Sen dominance.
Ideology, sects, state and totalitarianism
Peter Bernholz
The traditional theory of totalitarianism, in spite of ist undisputed merits has mainly remained a static theory. Static in the sense that it developed concepts to describe the characteristics of political systems thought to be totalitarian for given points in time. We abolish this limitation and present a theory capable of explaining which factors may lead, under specified conditions, to Totalitarian Regimes, and which factors change those regimes in time, bring about their transformation into other regimes or cause their breakdown. In doing so we will generalize the theory in such a way that it covers a much broader class of cases of ideocratic regimes and relate them to other political systems. It is obvious that such a theory needs to describe the forces which drive non-totalitarian systems towards totalitarianism and are also able to change or to abolish this regime itself. These forces have also to be able to overcome obstacles in the way of a totalitarian development, and conditions have to be stated under which they are probable to succeed. Moreover, the consequences have to be analyzed for cases in which the relevant driving forces are not successful. It is shown that the invention and introduction of an ideology with supreme values is a necessary condition for the development of a totalitarian regime. It is, however, not a sufficient condition, since it has to be combined with the secular power of a state to make such a regime possible. But a combination of spiritual and secular power can only occur if a well-organized ideological movement is created with a spiritual leader or leadership, who alone have the right to interpret the ideology. Both conditions are necessary to provide a chance to grasp the secular power of the state. Thus, e.g., the absence of a monopoly of interpretation will usually lead to sectarian developments and thus weaken or even split the movement. But even the creation of a strictly organized ideological movement with a monopoly of spiritual leadership is not sufficient to get hold of secular power. For this a major crisis as perceived by a relevant part of the population is necessary. Otherwise a majority cannot be reached in democracies or enough people in the officer corps of the army and (or) police in authoritarian regimes be convinced. If secular and spiritual power have been combined, the supreme values can be enforced, as required by their absolute truth. Opponents have to be converted. Is by a flat tax: empirical evidence from Italy, Norway and Sweden
Public provision of private goods: the case of health care
Roberto Zanola
The paper examines the question of public vs. private health care provision, by extending the work of Gouveia (1997). A two stage model is outlined, in which health care quality is endogenized. The characterisation of the equilibrium solution shows that the choice of consuming public or private health care depends on both its quality and the median voter's income. I also extend the model by considering the case of a multiple issue election, in which the government supplies both public health care and a pure public good.
Labor supply in Italy An empirical analysis of joint household decisions, with taxes and quantity constaints
Rolf Aaberge, Ugo Colombino, Steinar Strøm
The present study applies an econometric framework which allows for complex non-convex budget sets, highly non-linear labor supply curves and imperfect markets with institutional constraints. A married couple version of the model is estimated on Italian microdata. The empirical results show that male labor supply is rather inelastic while labor supply among females, especially participation, is considerably more elastic. The elasticities depend strongly on household income. The largest elasticities are found for females living in poor households. The results of the tax simulations suggest that there are only modest labor supply responses from replacing the 1987 system by proportional taxes.
Evaluating alternative tax reforms in Italy with a model of joint labor supply of married couples
Rolf Aaberge, Ugo Colombino, Steinar Strøm, Tom Wennemo
In this paper we estimate a model of household labor supply using an econometric approch that allows simultaneous decisions of household members, complex and non-convex choice sets induced by tax and benefit rules, and quantity constraints on hours choice. The model is estimated using the 1993 Bank of Italy's Survey of Household Income and Wealth, and used to simulate three hypothetical tax reforms: namely, a flat tax and two versions of a negative income tax system, under the constraint of equal tax revenue. All these reforms contain both incentives to work less and incentive to work more. The incentives to work more seem to prevail, at least for the more productive: the labor supply elasticities, although modest, are sufficiently large (especially female participation elasticity), so that all the reforms produce a larger household average disposable income, without worsening much the equality of the income distribution as measured by the Gini index. A remarkable result is that no significant "poverty trap" effect is associated with the negative income tax reforms. All the reforms are supported by a majority of winners in the sample, although the proportion of winners varies considerably across income deciles.
Labor supply responses and welfare effects from replacing current tax rule
Rolf Aaberge, Ugo Colombino, Steinar Strøm
This paper employs a microeconometric framework to examine the labor supply responses and the welfare effects from replacing current tax systems in Italy, Norway and Sweden by a flat tax on total income. The flat tax rates are determined so that the tax revenues are equal to the revenues as of 1992. The flat tax rates vary from 23 (Italy), 25 (Norway), to 29 (Sweden) percent. In all three countries the labor supply responses decline sharply with pre-reform disposable income. The results show that the efficiency costs of the current tax systems relative to a flat tax may be rather high in Norway and much lower, but positive, in Italy and Sweden. In all three countries "rich" households — defined by their pre-tax-reform income — tend to benefit more than "poor" households. In Italy and Sweden a majority will lose from a shift to a flat tax, while in Norway a majority is predicted to win.
Social evaluation of individual welfare effects from income taxation: empirical evidence based on Italian data
Rolf Aaberge, Ugo Colombino, Steinar Strøm
This paper discusses methodological principles for social evaluation of tax system and tax reforms when concern is primarily turned to who gains and who loses. The discussion is followed by an empirical analysis based on Italian household data. Using a household microeconometric labor supply model we have simulated behavioral responses and welfare gains and losses for married couples resulting from replacing the Italian tax system as of 1993 by proportional taxation.
Economic activities and the resilience of ecological system: a stochastic approach
Silvana Dalmazzone
This work explores how qualitatively different impacts imposed on the environment by economic activity affect the relative importance of resilience measures focusing respectively on the return time and on the stability domain. Particularly, indicators of environmental impact of economic activities are shown to crucially depend on whether the ecosystem is subject to continuous or rather repeated discrete shocks. A stochastic approach allows the problem of accumulation arising from disturbances of a continuous nature to be embedded in the model, and therefore systematically dealt with. Such an approach in turn highlights the need for a new measure of resilience, encompassing features of both the currently most widely used definitions.
Voting for public health care: evidence from Italy
Roberto Zanola
This paper uses a panel of Italian data to test the empirical predictions of a number of theoretical models aimed at explaining the level of public health care expenditure. The estimations provide some support for the models illustrated in the paper. Lower median voter income, older population, lower differences in taste, higher taxes, are associated with a higher public health care expenditure. However, each of these models do not enclose some of the variables which are significant in other models. Hence, in the last part of the paper I present a unified model, whose results are robust under fixed effects estimations.
The structure and contributions of relational contracts: theory and evidence from oil and gas unit operationg agreements
Gary D. Libecap, James L. Smith
This paper extends the existing theory and empirical investigation of unitization contracts as relational agreements. It highlights the importance of incentive compatibility and self-enforcement and the bargaining problems faced in achieving viable, long-term contracts. Essential relational elements are identified, and the conditions that promote their inclusion in unit contracts are described. Alternative, although less complete and effective, agreements are introduced and linked to specific geological and market condition. Testable hypotheses are derived about when complete unit contracts will be observed and about the rent dissipation that follows if the contracts are not relational. The empirical investigation makes use of the largest data set of unitization contracts compiled to date-60 unit contracts in the United States and Canada.
The birth and failure of the EMU project
Enrico Colombatto
The birth of EMU has been characterized by the emphasis which both its supporters and its antagonists have laid upon its political features and implications. These are so vague, however, that one may wonder about the actual foundations of the original project. The paper argues for a hard-core political design to rule Europe. This challenge had to be met by the "weak" countries in order to maintain their privileges and to withstand pressure from the prospective EMU members. According to the paper, the original project failed, both for reasons beyond EU control (globalization and successful transition in some formerly-communist countries), and because of the compliance of the weak with the Maastricht guidelines.
Failure to launch EMU according to the original hard-core outlay underscore its likely costs in terms of centralization, less accountability, greater amount of policy-making, more layers of government. Economic performance will be affected, and so could the attitude of public opinion towards the process of (top-down) European integration.
Information distortion in transfer programs: the case of ethanol
Ronald N. Johnson, Gary D. Libecap
This paper examines the distortion of information by politicians in order to provide transfers to constituents. We challenge the analogy between competitive markets and the political process in a representative democracy that is often presented as a constraint on political opportunism. We present a theoretical framework and a case study of ethanol subsidies. The paper argues that wasteful transfer programs can be initiated and maintained due to a lack of accurate information available to general voters for program assessment. The absence of voter information is due to a willful distortion of information by politicians. We define the opportunistic manipulation of information about program benefits and costs by politicians for political gain and obfuscation. We argue that the information available to voters to evaluate the claims of politicians about program benefits and costs is far less than available to consumers in evaluating the claims of firms about product quality. The greater ability of politicians to manipulate and control information follows from the relative absence of property rights to program benefits and costs in the political arena.
Increasing supply, improving allocation, and furthering justice and decency in organ acquisition and allocation: the many virtues of markets
Lloyd R. Cohen
Professor Cohen begins by recapitulating his earlier published proposal for an options market in cadaveric transplant organs. He then responds to criticism of his proposal as shallow, ideologically driven, and bereft of empirical support. Professor Cohen extends his earlier proposal to argue in favor of a market in kidneys obtained from living donors. Finally, Professor Cohen attacks United Network for Organ Sharing (UNOS) point allocation system for kidneys as morally bankrupt and calls for its replacement by a market solution, in which organs would be allocated on the basis of willingness to pay.
The new institutional economics and economic development
Gary D. Libecap
This paper summarizes key arguments of the New Institutional Economics (NIE). This literature extends neoclassical economics to empirically-important cases where standard analysis have been unsatisfactory- where economic relationships are long term, exchanges are not discrete, the number of trading parties is small, information is asymmetric, transactions costs are high and there is asset specificity. These conditions not only typify modern economies, but are likely to be especially important in development contexts. Property rights issues are surveyed for predictions regarding economic incentives and behavior, and two empirical examples are presented-titling on the Brazilian Amazon frontier and oil field unitization in the United States. Both examples show the welfare advantages of particular agreements, yet the extent of optimal institutions is less than neoclassical analysis would predict. Because property rights are political institutions, the political economy of institutional change is examined. One cannot predict that optimal arrangements will emerge from the political process. The paper summarizes various tax, expenditure, and labor law policies adopted by U. S. states to promote economic development as examples of institutional arrangements. The paper concludes by arguing that economic competition among politicians and political jurisdictions helps to mold development policies toward more favorable outcomes.
The human genome project and the economics of insurance: how increased knowledge may decrease human welfare, and what not to do about it
Lloyd R. Cohen
Increased knowledge of individual gene structures has the potential to reveal medical predispositions for disease, disability, and death long before their symptoms present themselves. Early acquisition of this knowledge offers the potential advantage of permitting medical, interventions that will alleviate or prevent these medical problems. But, these advantages are highly speculative. Actually discovering successful medical interventions for genetic disorders is likely to prove extremely elusive and so the medical gain may in turn prove small, particularly in the near term. At the same time the ability to acquire knowledge of one's medical predispositions--even if unrealized--may result in substantial damage to one=s ability to purchase life, health, and disability insurance. This increased genetic knowledge not only will result in a gain to some and a loss to others in the insurance market, but will also result in an unambiguous social welfare loss to the society as a whole. Thus an interesting series of questions are presented as to the ethics and economics of various public policies to counteract these effects.
Gli Stati Uniti: "Un paese senza legge?"
Jonathan R. Macey
(abstract not available)
Lotteries, liberty, and legislatures
Lloyd R. Cohen
The central purpose of this paper is to show that lottery play is not economically irrational and uninformed. The paper presents a theory of lottery tickets not as misguided inputs into wealth production as some critics believe but as valuable inputs into daydreams about escaping one=s current life by acquiring great wealth. In the course of the discussion the claim that the lottery is a regressive tax is investigated and a variety of empirical predictions are generated as to patterns of purchase both across groups and by individuals. Finally the insights gained from the earlier discussion are employed as a springboard to reground the normative use of the assumption of rational utility maximization.
Property rights to land and land reform: legal inconsistencies and the sources of violent conflict in the Brazilian Amazon
Lee J. Alston, Gary D. Libecap, Bernardo Mueller
In this paper we examine the determinants of violent conflict over land in the Brazilian Amazon. We highlight the pivotal roles of settlement process and the legal bases for conflicting claims to land. Although civil law guarantees the sanctity of title, the Brazilian Constitution adds a beneficial use criterion as a condition for title enforcement. This provision is part of a land reform or redistribution effort. Forested lands on large private farms do not meet this criterion and hence, are vulnerable to invasion by squatters. Any analytical framework is provided to generate hypotheses for testing. Using data from the Brazilian census and the Pastoral Land Commission for the estate of Pará we examine the characteristics of regions where violence predominates. Our empirical results indicate that a greater policy emphasis on land reform in Brazil through expropriation to reduce violent conflict, is likely to have the unanticipated effect of increasing violence. The results of the paper are suggestive not only for Brazil, but for elsewhere in Latin America where there is tension between the goals of secure property rights and wealth redistribution.
Transition as a bargaining problem
Enrico Colombatto, Jonathan R. Macey
This article develops a game theoretic framework to
explain the difficult process of transition from central planned to open economies. In
particular, we are interested in explaining why the process of transition begins at
roughly the same time, so that differences in the technological tools and stock of
knowledge available to assist in the transition process cannot explain the observed
differences in performance.
We model the process of transition as a bargaining problem in which transaction
costs explain the observed variation in performance among countries in transition.
Starting with
the premise that economic growth will produce a larger economic "pie" and thus
large gains from trade, we identify the central challenge in transition as the bargaining
problem that plagues entrenched bureaucrats who can successfully resist reform, and
reformers who stand to gain if reforms can successfully be implemented. The bargaining
problem is non-simultaneity of performance. For liberalization to occur, legal reform and
other changes are needed immediately. These changes willmake producers better off in the
short run. Unfortunately, the gains from liberalization cannot be realized until after
the reforms have been implemented. Thus for successful transition to occur, producers
and rent-seekers must find a way to overcome this time inconsistency problem.
Transaction costs that impede bargaining between these two groups will critically
determine the success or failure of transition. In this article we explain the
nature of
the transaction costs that impeded the bargaining process between producers and
bureaucrats, and we make predictions about which coutries are likely to succeed
in transition based on an assessment of the gains from trade relative to the
level of
relevant transaction costs in a given country.
On the methodology of Ludwig von Mises
Kurt R. Leube
Although Ludwig von Mises was one of the most influential social philosophers and economists of this century who, among other seminal achievements had already in the 1920s clearly demonstrated the impossibility of socialist calculation, mainstream economics still either ignores or neglects him. There is hardly a book on the hisstory of economic thought, let alone a standard economics text where Mises' great works are appropriately featured or mentioned. Almost like Francesco Ferrara, a leading Italian proponent of free markets in the 19th century, Mises was never offered a regular professorship, and yet his methodology profoundly changed the thoretical approach to human action. His originality becomes all the more striking when one foregoes a general consideration of nineteenth century thinking on economic institutions and economic policy and instead concentrates on an examination of some of the main elements of Carl Menger's work out of which Mises' own methodology emerged. Without claiming to be exhaustive in any way in this paper an attempt is made to shed some light on the background of Ludwig von Mises' turn to free market economics, to elaborate on his important position regarding scientific "Wertfreiheit", and to exlain how he arrived at his concept of "praxeology".
Lawyers in agencies: economics, social psychology and process
Jonathan R. Macey
This article examines
the role of lawyers within
governmental regulatory agencies. The article advances the theory that including
lawyers as part of the personnel within administrative agencies has both costs and
benefits. The costs come in terms of added transaction costs due to more procedures
required to advance agency initiatives. The benefits come from the fact that lawyers
are likely to be less captured by the dominant ideology within an administrative agency
than other agency officials due to the fact that lawyers as members of a profession owe
their primary allegiance to this profession rather than to the agency. Lawyers are
more inclined to see the benefits of advocacy and the value of establishing rules and
procedures that ensure the fairness of proceedings than others. By contrast,
social scientists such as economists are relatively more inclined to believe
in the value of the
scientific method in which objectively refutable hypotheses are developed and
t!
hen subjected to statistical testing. One's own ideas about the relative
merits of these contrasting ideologies inevitably will inform our views about
how the administrative
state ought to be constructed.
Formal and informal rules in post-communist transition
Jan Winiecki
The paper concerns the extent of the impact that informal rules (customs, etc.) may have on the course of post-communist transition from plan to market by affecting the ways people react to formal rules. There are two major parts of the paper. The first deals with the impact of IFRs on a range of areas (law, morals, ideology, and politics), while the second considers the extent of that impact upon alternative transition paths suggested by different strands of thinking on transition and their relative probabilities of success.
Solving foreign trade puzzles in post-communist transition: impact of past distorsions
Jan Winiecki
This paper deals with foreign trade in post-communist transition economies. It is primarily concerned with explaining certain early transition developments, unexpected or neglected by many transition experts and policy makers. The present writer discusses, then, the contribution of foreign trade among ex communist economies to the unexpected steep output fall registered by each of them, reasons for rapid reorientation of their trade toward the high income Western economies, the disappearance of dual export structure (different for Westward and Eastward exports), etc. As explained in the paper, most of the puzzles stem from the neglect of the impact of communist economic system-generated distortions of the transition process.
The crisis of the European experiment in centralized federalism (the ambiguities of a harmonized currency union)
Enrico Colombatto
The Euro is to see the light very shortly, but public opinion is far from enthusiastic about it. Although the perception about the cost of not being a member of the EMU is clear, the costs and benefits of being "in" generate some uneasiness. This paper suggests three sources of apprehension: (1) the weak support for the creation of harmonized monetary union, (2) the lack of justification for a process of centralization in policy making, (3) the failure of the original hard-core version of EMU. Managing the Euro will turn out to be much more difficult than creating it. As a consequence of that, tensions among EMU members could arise easily. If so, the whole Eu/EMU project would suffer. Federal authorities may thus be induced to curb rentseeking and perhaps pursue the public interest with more determination. Hence, one cannot rule out that the newly born Euro will be accompanied by relatively good policy-making, at least in the short run.
The choice of exchange rate regime under a large currency substitution in Yugoslavia
Mladjan Dinkic
The basic precondition for a definite reduction of high inflation in Yugoslavia is a balanced government budget and complete elimination of the quasi-fiscal deficit. This paper takes into account the choice of exchange rate regime in conditions of considerable currency substitution, which would support the fiscal reform in the most efficient way, towards creation of long-term macroeconomic stability. Experiences of other countries indicate that in the case of Yugoslavia it would be appropriate and theoretically possible to apply one of three alternative currency arrangements: (1) currency board; (2) official dollarization; (3) dual currency system. Our analysis shows that Yugoslavia at this moment does not fulfil the economic preconditions for introducing a typical currency board. On the other hand, official dollarization would not be a politically popular step. Because of that we suggest dual currency system - introduction of the German mark as a parallel legal tender which would officially coexist with a domestic currency. We prove that it would contribute that inevitable fiscal adjustment of the Yugoslav economy is carried out both efficiently and quickly, within a limited transitional period.
Logique marchande et service public de la justice
Christian Barrere
The paper focuses on the function of the judicial system and, in particular, on the relation between judicial logic and market logic. The first part discusses the Posnerian interpretation of the judicial system both as a producer of the conditions enhancing free exchange, and as an organization mimicking market logic. The second part presents an interpretation of the dualism typical of the working of judicial systems. The third part tries to characterize judicial systems as a public utility.
State's enterprise zone policies and local employment. What lessons can be learned?
Daniele Bondonio
In response to the deteriorating condition of many U.S. urban areas, a common state and local policy initiative have been the provision of tax and other business incentives aimed at attracting to or retaining businesses in these distressed areas. Because states, instead of the federal government, first implemented this type of geographically-targeted initiative, referred to as enterprise zones (EZ), a large variety of autonomous programs emerged. In this paper I address the question of what can be learned from the states' experience about the impact of different EZ policies on local employment. The paper develops a comparative evaluation that assess the impact of five states' EZ programs by controlling for the monetary value of the incentives awarded to zone businesses and for specific key program features which might be responsible for a marginal increase or decrease of the observed impact on local employment. The results of this paper show that the EZ programs analyzed do not have a significant impact on local employment. These results are insensitive to the different monetary values of the incentives provided by the programs and to any of their specific policy features. No significant impact is also detected when the effectiveness of EZ programs is tested on single-industry employment figures instead of on total employment.
Interventions and exchange rates: an analysis with high frequency data
Andrea Beltratti, Claudio Morana
We use high frequency data for the mark/dollar exchange ratefor the period 1992-1995 to evaluate the effects of the interventions. We estimate an unobserved components model that decomposes volatility into non-stationary and stationary parts. Stationary components in turn are decomposed into seasonal and non-seasonal intra-day parts. Our results confirm the view that interventions are not particularly effective. The exchange rate moves in the desired direction only about 50% of the time, and often with a substantial increase in volatility. The model suggests that the two components which are effected the most by interventions are the permanent and the stochastic intra-day.