Showing papers in "Journal of Public Economic Theory in 2015"

The Simple Microeconomics of Public-Private Partnerships

Abstract: We build on the existing literature in public-private partnerships (PPP) to analyze the main incentive issues in PPPs and the shape of optimal contracts in those contexts. We present a basic model of procurement in a multitask environment in which a risk-averse firm chooses noncontractible efforts in cost reduction and quality improvement. We first consider the effect on incentives and risk transfer of bundling building and management stages into a single contract, allowing for different assumptions on feasible contracts and information available to the government. Then we extend the model in novel directions. We study the relationship between the operator and its financiers and the impact of private finance. We discuss the trade-off between incentive and flexibility in PPP agreements and the dynamics of PPPs, including cost overruns. We also consider how institutions, and specifically the risk of regulatory opportunism, affect contract design and incentives. The conclusion summarizes policy implications on the desirability of PPPs.

Government opportunism in public-private partnerships

Abstract: This paper analyzes the contracting out of public services through public-private partnerships (PPP) subject to government opportunism. In PPP, the building of public infra-structure and the provision of related services are procured through only one contract. On the one hand, such bundling of tasks provides incentives to invest in the infrastructure to minimize the cost of providing public services over the long term. On the other hand, it creates incentives for the government to behave opportunistically, by not respecting the terms of the long-term contractual agreement. Contrarily, in the traditional procurement (TP), the public service provision tasks are contracted out separately. The purpose of this paper is two fold. First, we show that government commitment not to engage in opportunistic behavior is the key factor determining the cost efficiency of PPP. Second, we specify the economic determinants of government's choice between PPP and TP under government opportunism.

Imperfect Bundling in Public–Private Partnerships

Abstract: The economic literature on PPPs has often overlooked contractual incompleteness and agency problems within the private consortium (or Special Purpose Vehicle, SPV) joining the PPP. Taking into consideration such imperfections in bundling different tasks, SPV ownership structure becomes the main instrument to trade off the power of incentives of different private partners. Under imperfect bundling, the scope for welfare-improving PPP reduces, i.e., a stronger positive externality between investment and operation is required. Also, privately negotiated SPV ownership structures always involves less-than-socially-optimal shares to Builders. Thus, it is optimal for the government to impose minimum ownership requirements in PPP contracts.

Measuring social polarization with ordinal and categorical data

Abstract: We examine the measurement of social polarization with categorical and ordinal data. We partition the society into groups on the basis of salient social characteristics, such as race and ethnicity, and we take into account the extent to which these groups are clustered in certain regions of an attribute's distribution. This is particularly useful in many contexts where cardinal data are not available. The new measures we propose are characterized axiomatically.

Prosecutorial Retention: Signaling by Trial

Abstract: We examine how retention motives affect prosecutor behavior under different evaluation criteria. In particular, we analyze how prosecutors of differing capabilities respond in choosing which cases to take to trial and which to plea bargain. We show how different criteria distort the mix of cases chosen for trial and that the direction of the distortion depends crucially on the evaluation tool used. Optimal evaluation metrics are derived that combine multiple signals of performance and are shown to achieve the first-best outcome.

Legalization of Bribe Giving when Bribe Type Is Endogenous

Abstract: A recent paper, Basu argues that for a class of bribes, called harassment bribes, legalization of bribe giving, but not bribe taking, will reduce bribery. We examine the applicability of Basu's insight in an environment in which the type of the bribe—harassment or nonharassment—is endogenously determined, and it is not feasible to legalize the giving of nonharassment bribes. We find that in such an environment Basu's proposal, in and of itself, yields mixed results: in one case it reduces even the prevalence of nonharassment bribes, and improves social welfare. However, in another case it is shown to be counter-productive, i.e., it reduces social welfare while failing to eliminate bribery. Our analysis finds parameter values that determine which of the two cases will prevail, and points to additional policies aimed at strengthening the legal institutions which, in conjunction with Basu's proposal, will help reduce bribery.

Default and Renegotiation in Public-Private Partnership Auctions

Abstract: The winners of auctions for pubic-private partnership contracts, especially for major infrastructure projects such as highways, often enter financial distress, requiring the concession to be reallocated or renegotiated We build a simple model to identify the causes and consequences of such problems In the model, firms bid toll charges for a fixed-term highway concession, with the lowest bid winning the auction The winner builds and operates the highway for the fixed concession period Each bidder has a privately known construction cost and there is common uncertainty regarding the level of demand that will result for the completed highway Because it is costly for the government to reassign the concession, it is exposed to a holdup problem, which bidders can exploit through the strategic use of debt Each firm chooses its financial structure to provide optimal insurance against downside demand risk: the credible threat of default is used to extort an additional transfer payment from the government We derive the optimal financial structure and equilibrium bidding behavior and show that (i) the auction remains efficient, but (ii) bids are lower than they would be if all bidders were cash-financed, and (iii) the more efficient the winning firm, the more likely it is to require a government bailout and the higher the expected transfer it extracts from the government We discuss potential resolutions of this problem, including the use of least-present-value-of-revenue auctions

Privatization, Underpricing, and Welfare in the Presence of Foreign Competition

Abstract: We analyze privatization in a differentiated oligopoly setting with a domestic public firm and foreign profit-maximizing firms. In particular, we examine pricing below marginal cost by the public firm, the optimal degree of privatization, and the relationship between privatization and foreign ownership restrictions. When market structure is exogenous, partial privatization of the public firm improves welfare by reducing public sector losses. Surprisingly, even at the optimal level of privatization, the public firm's price lies strictly below marginal cost, resulting in losses. Our analysis also reveals a potential conflict between privatization and investment liberalization (i.e., relaxing restrictions on foreign ownership) in the short run. With endogenous market structure (i.e., free entry of foreign firms), partial privatization improves welfare through an additional channel: more foreign varieties. Furthermore, at the optimal level of privatization, the public firm's price lies strictly above marginal cost and earns positive profits.

Cleaner Technologies and the Stability of International Environmental Agreements

Abstract: This paper shows that, if countries are farsighted when deciding whether to defect from a coalition, then the implementation of cleaner technologies may jeopardize the chances of reaching an international environmental agreement. The grand coalition may be destabilized by the implementation of cleaner technologies, ultimately resulting in higher global emissions and lower global welfare. We further show that the higher the stock of pollution at the instant when the cleaner technology is implemented, the more likely that the above mechanism unfolds. We examine a reduction in the emission per output ratio as well as measures that enhance the natural rate of decay of stock pollutants.

International Environmental Agreements under Endogenous Uncertainty

Abstract: This paper explores the implications of the possibility of a shift in environmental damages on the participation in environmental treaties. Using a two-period model where the probability of a regime shift increases in the first-period pollution stock, we examine the issue of coalition formation under both fixed and dynamic membership. Our analysis suggests that endogenous uncertainty may increase participation. We find that full cooperation may be sustained, but only in the presence of endogenous uncertainty. Interestingly, when the shift in the environmental damage is large enough, the model provides a way to solve the “puzzle of small coalitions” found in the literature related to international environmental agreements. We also find that in period 1 (period 2) endogenous uncertainty leads to a lower (higher) pollution stock under dynamic membership as compared to the fixed membership case.

Voter turnout and political rents

Abstract: Is the decline in voter turnout an indicator of a worse health of a representative democracy? We build a simple probabilistic-voting model with endogenous turnout to address this question. We find that a lower turnout caused by a higher cost of voting implies higher political rents. Contrarily, a lower turnout caused by a higher ideological mobility of voters or by a lower expressive benefit of voting implies lower political rents. If voters have a civic-duty motive to vote that depends on the level of rents, multiple equilibria (a high-rents low-turnout and a low-rents high-turnout) arise.

Welfare Stigma Re‐Examined

Abstract: We dissect welfare stigma into two types: traditional and statistical, and show that the latter can be employed as a desirable form of a welfare ordeal, as its costs are positively correlated with ability.

Public-Private Contracting under Limited Commitment

Abstract: A government delegates a build-operate-transfer project to a private firm in a limited-commitment framework. When the contract is signed, parties are uncertain about the operating cost. The firm can increase the likelihood of facing a low cost by exerting some non-contractible effort while building the facility. Once the facility is in place, the firm learns the marginal cost and begins to operate. We characterize the contract which stipulates the efficient allocation. We study the financial structure and duration that secure its enforcement. To this end, we take into account that break-up of the partnership occasions a replacement cost for the government and an expropriation cost for the firm and its lender. urthermore, both these costs are higher the earlier the contract is terminated. Enforcement is achieved as follows. The firm is instructed to invest some ntermediate amount of own and borrowed funds. Under the aegis of a third party that can commit, the overnment provides guarantees to the lender, conditional on continuation of the partnership. Duration may be shortened, though not to the point where the initial effort of the firm is uncompensated.

Piecemeal Reform of Domestic Indirect Taxes toward Uniformity in the Presence of Pollution: with and without a Revenue Constraint *

Abstract: The literature on indirect tax reforms in pollution-ridden economies is quite limited. This paper, using a general equilibrium model of a perfectly-competitive small open economy with both production and consumption generated pollution, considers the welfare implications of tax reforms that take the structure of consumption and production taxes toward uniformity. Specifically, both in the presence and absence of a binding government revenue constraint, we derive sufficient conditions for welfare improvement in the case where we implement (i) reforms in either production or consumption taxes, and (ii) reforms in both consumption and production taxes.

The Strategic and Effective Dimensions of the Border Tax Adjustment

Abstract: Between 2001 and 2011, the Kyoto Protocol has experienced defections of two countries that took part in its negotiation and accounted for around 44% of all parties' emissions. The border tax adjustment, a tax levied on imports to reproduce domestic taxation on similar goods, is advocated to prevent such compliance failures as well as to support unilateral pollution regulations by mitigating firms' competitiveness losses and carbon leakages. The paper investigates whether this trade instrument can constitute a decentralized solution to achieve the first-best in a noncooperative framework. It develops a two-country two-firm reciprocal-market model of trade with global pollution and country heterogeneity. Countries' interactions are studied following a noncooperative game theory approach, for two scenarios defined by the possibility to implement a border tax adjustment to sanction unilateral deviation from the cooperative situation. The paper predicts first that this opportunity modifies the countries' choices of strategies toward more compliance; second that among the strategic and effective dimensions of the border tax adjustment, only the former allows to achieve the first-best; finally that the border tax adjustment fosters countries' participation in the cooperative international environmental agreement.

Corruption and Development Policy (Drawing Upon the Recent Indian Debate)

Abstract: There is a substantial theoretical literature now on the factors determining the incidence of corruption, suggesting some policies to fight it, but we do not have a great deal of empirical evidence on the effectiveness of these policies. This paper is a brief overview, drawing upon some of the salient features of the literature and with several examples from the Indian case where corruption has become a major issue of public debate, to make remarks that may be more generally relevant for policies in developing countries.

Balanced‐Budget Rules, Elasticity of Substitution, and Macroeconomic (In)Stability

Abstract: This paper examines the relation between factor substitution and (local) stability of equilibria in a one-sector real business cycle model under balanced-budget rules. We show that under non-unitary elasticity of factor substitution, the Schmitt-Grohe-Uribe indeterminacy result can be altered. Using the two-step normalization procedure, we highlight two opposing effects of factor substitution, namely, the efficiency effect and the distribution effect, on aggregate stability. With endogenous distortionary taxes and gross substitutability between capital and labor, the existing literature overlooks the distribution effect and finds that balanced-budget rules are likely to deliver indeterminacy. However, if capital stock is relatively more abundant, a higher elasticity of substitution generates a source of stability due to the distribution effect. Our calibration shows that the distribution effect is always the dominating force.

Contracting for Infrastructure Projects as Credence Goods

Abstract: Large infrastructure projects are a major responsibility of urban and regional governments, who usually lack expertise to fully specify the demanded projects. Contractors, typically experts on such projects due to experience with similar projects elsewhere, advise of the needed design in their bids. Producing the right design is nevertheless costly. We model such infrastructure projects taking into account their credence goods feature and the costly design effort they require and examine the performance of commonly used contracting methods. We show that when building costs are homogeneous and public information, multi-stage competitive bidding involving shortlisting of two contractors and contingent compensation of both contractors on design efforts outperforms sequential search and the traditional Design-and-Build approach. If building costs are private information of the contractors and are revealed to them after design cost is sunk, sequential search may be superior to the other two methods.

Public Expenditures, Growth, and Distribution in a Mixed Regime of Education with a Status Motive

Abstract: This paper tackles the issue of growth, distribution, and the provision of public services in a growth model with human capital accumulation where heterogeneous individuals decide whether to attend a publicly funded education regime or a privately funded one. Heterogeneity of individuals is introduced via their status-motivation which is shown to affect their choice of education. In such a framework, we obtain an inverted-U shaped relationship between growth and the size of the public education sector. In contrast with the general wisdom, we show that a larger public education sector is compatible with both a reduction of inequalities and an increase of long-term growth. Although we demonstrate that in a majoritarian system all individuals agree on a lower size of the public education regime than that which maximizes growth, our analysis also highlights the tension between the direct beneficiaries and nonbeneficiaries from the public regime.

Optimal Fiscal Policy with Endogenous Time Preference

Abstract: This paper studies the role of Ramsey taxation under the assumption that the individual rate of time preference is determined by the publicly provided social level of education. We show how intertemporal complementarities of aggregate human capital can generate multiple equilibria and we examine the role of endogenous fiscal policies in equilibrium selection. Our analysis implies a lower optimal government size due to the effect of human capital on time preference.

Pricing of Transport Networks, Redistribution, and Optimal Taxation

Abstract: We study optimal pricing of roads and public transport in presence of nonlinear in- come taxation. Individuals are heterogeneous in unobservable earning ability. Optimal transport tarifs depend on time costs of travel and work schedule adjustments (days and hours worked per day) as a response to commuting costs. We find that discounts for low income individuals are optimal only if the time cost of a trip is small enough. Lower travel time costs facilitate screening: therefore, redistribution provides an additional motive for congestion pricing. Finally, we investigate the desirability of means-testing of transport tarifs.

Optimal Income Taxation with Risky Earnings: A Synthesis

Abstract: We study optimal nonlinear income taxation when earnings can differ because of both ability and luck, so the income tax has both a redistributive role and an insurance role. A substantial literature on optimal redistribution in the absence of risk has evolved since Mirrlees's original contribution. The literature on the income tax as a social insurance device is more limited. It has largely assumed that households are ex ante identical so unequal earnings are due to risk alone. We provide a general treatment of the optimal income tax under risk when households differ in ability. We characterize optimal marginal tax rates and interpret them in terms of redistribution, insurance, and incentive effects. The case of ex ante identical households and the no-risk case with heterogeneous abilities come out as special cases.

Environmental Standards in a Large Open Economy

Abstract: The small-country price-taking assumption of Oates and Schwab is relaxed to consider a large open economy that can influence its net capital return. This creates an incentive for the country to distort its policies. The key question asked is whether this induces inefficient outcomes. The result is that if the country has a dedicated tax on capital and uses this tax optimally, the Oates and Schwab first-best result still holds. However, efficiency in a large open economy requires that the tax on capital be nonzero, unlike Oates and Schwab where the capital tax must be zero for first-best efficiency.

Optimal Capital Taxation in a Neoclassical Growth Model

Abstract: This paper studies the optimal factor tax incidence in a neoclassical growth model with a given share of government expenditure in output. In the Ramsey planner's optimization, the effect of next period's capital on government expenditure equals the given share of the marginal product of capital. Capital accumulation reduces the discounted net marginal product of next period's capital by way of increasing government expenditure. In order to internalize the distortion, it is optimal to tax capital income in the long run.

Institution building and political accountability

Abstract: The paper examines the role of policy intervention in engendering institutional change. We show that first order changes in the political structure (e.g. introduction of democracy) may be undermined by local political interests and result in persistence in institutions and the (poor) quality of governance. The paper identifies two effects of development policy as a tool for institutional change. One, by increasing political accountability, it may encourage nascent democratic governments to invest in good institutions – the incentive effect. However, we show that it also increases the incentive of the rentier elite to tighten their grip on political institutions – the political control effect. Which of these dominate determine the overall impact on institutional quality. Under some conditions, by getting the elite to align their economic interests with that of the majority, development policy can lead to democratic consolidation and economic improvement. However if elite entrenchment is pervasive, then comprehensive change may require more coercive means.

Optimal Decisions on Pension Plans in the Presence of Information Costs and Financial Literacy

Abstract: Pension reforms are on the political agenda of many countries. Such reforms imply an increasing responsibility on individuals’ side in building an efficient portfolio for retirement. In this paper, we provide a model describing workers’ choices on the allocation of retirement savings in presence of (1) mandatory pension contribution; (2) different pension plans; and (3) information costs and financial literacy investment decisions. In particular, we characterize the results from both a positive and normative standpoint, by highlighting the determinants of individuals’ choice, with special focus on information costs, on the role of income and preferences, and by characterizing the optimal contribution rate to mandatory complementary pension plans. We also introduce endogenous financial literacy and analyze how its optimal level is determined and how it affects the decisions on pension plans.

Corruption and Seigniorage

Abstract: There is convincing empirical evidence in cross-section data of a positive correlation between the level of corruption and the rate of in‡ation. This paper explores whether this correlation can be a consequence of a government exploiting seigniorage to compensate for revenue lost to corruption. We embed corruption within an overlapping generations economy that has money as the only store of value and in which the government op^

Efficient Management of Insecure Fossil Fuel Imports through Taxing Domestic Green Energy

Abstract: A small open economy produces a consumer good as well as renewable (green) and fossil fuel based (brown) energy. It imports fossil fuel at an uncertain price and suffers from carbon emission damages. Unregulated competitive markets are shown to be inefficient. The implied market failures are due to the agents' attitudes toward risk, to risk shifting, and the uniform price for both types of energy. Under the plausible assumptions that consumers are prudent and at least as risk-averse as the producers of brown energy, the risk can be efficiently managed by placing a tariff on fuel imports (which is equivalent to taxing carbon emissions in the model at hand) and taxing green energy. The need to tax green energy contradicts the widespread view that subsidization of green energy is an appropriate means to enhance energy security in countries depending on risky fossil fuel imports.

Corruption in Committees: An Experimental Study of Information Aggregation through Voting 1

Abstract: We investigate experimentally the effects of corrupt experts on information aggregation in committees. We find that nonexperts are significantly less likely to delegate through abstention when there is a probability that experts are corrupt. Such decreased abstention, when the probability of corrupt experts is low, actually increases information efficiency in committee decision-making. However, if the probability of corrupt experts is large, the effect is not sufficient to offset the mechanical effect of decreased information efficiency due to corrupt experts. Our results demonstrate that the norm of “letting the expert decide” in committee voting is influenced by the probability of corrupt experts, and that influence can have, to a limited extent, a positive effect on information efficiency.

Public Input Competition under Stackelberg Equilibrium: A Note

Abstract: This paper examines the Stackelberg equilibrium for public input competition and compares it with the non-cooperative Nash equilibrium. Given two asymmetric regions, we show that under the Nash equilibrium, the more productive region tends to spend more on public input, which results in this region attracting more capital than the less productive region. The comparison of the two equilibria reveals that the leader region obtains a _rst-mover advantage under the stackelberg setting. This suggests that if regions interact with each other sequentially as in the Stackelberg equilibrium, then the regional disparity that is due to the heterogeneity of productivity is likely to be mitigated or enlarged, depending on which region performs the leadership role in the competition process.