Latest CESifo Working Papers

2467 Eeckhoudt, Louis / Schlesinger, Harris / Tsetlin, Ilia: Apportioning of Risks via Stochastic Dominance                     

Consider a simple two-state risk with equal probabilities for the two states. In particular, assume that the random wealth variable Xi dominates Yi via ith-order stochastic dominance for i = M,N. We show that the 50-50 lottery [XN + YM, YN + XM] dominates the lottery [XN + XM, YN + YM] via (N + M)th-order stochastic dominance. The basic idea is that a decision maker exhibiting (N + M)th-order stochastic dominance preference will allocate the state-contingent lotteries in such a way as not to group the two "bad" lotteries in the same state, where "bad" is defined via ith-order stochastic dominance. In this way, we can extend and generalize existing results about risk attitudes. This lottery preference includes behavior exhibiting higher order risk effects, such as precautionary effects and tempering effects. Download

2468 Halvorsen, Elin / Thoresen, Thor Olav: Parents' Desire to Make Equal Inter Vivos Transfers                       

This study argues that parents have a desire for dividing equally between their children, and that this motive applies to transfers of gifts inter vivos. We suggest that the equal division motive competes with traditional altruism: support to the child or the children with greatest needs. When parents are drawn between these two ambitions, the degree of income compensation should be stronger in one-child families and we expect the altruism motive to dominate the equal division desire at low levels of recipients’ income. We find support for both these hypotheses, when analysing Norwegian data for inter vivos transfers behaviour. The data include information about stated attitudes towards transfers among the parents, which also support the equal division motive. Download

2469 Montén, Anna / Thum, Marcel: Ageing Municipalities, Gerontocracy and Fiscal Competition                       

We develop a simple model of fiscal competition among ageing municipalities. When ageing advances, gerontocracies and social planners gradually substitute publicly provided goods aimed at the mobile young population for publicly provided goods for the elderly. This substitution process does not only depend on the ageing itself but also on crowding effects and on the regional distribution of the elderly population. We show that fiscal competition prevents the exploitation of the young. When the share of the elderly is sufficiently large, the utility of the young is even higher in gerontocracies than in welfare maximizing societies. Due to fiscal competition, the gerontocracies will provide even more of the publicly provided good for the young than the social planner. Download

2470 Meier, Volker / Wrede, Matthias: Reducing the Excess Burden of Subsidizing the Stork: Joint Taxation, Individual Taxation, and Family Tax Splitting                       

Analyzing a homogenous household setting with endogenous fertility and endogenous labor supply, we demonstrate that moving from joint taxation to individual taxation and adapting child benefits so as to keep fertility constant entails a Pareto improvement. The change is associated with an increase in labor supply and consumption and a reduction of the marginal income tax, while the child benefit may move in either direction. Similarly, a move from joint taxation to some scheme of family tax splitting increases labor supply and welfare. Download

2471 Schnabl, Gunther / Ziegler, Christina: Exchange Rate Regime and Wage Determination in Central and Eastern Europe                       

After the eastern enlargement of the European Union due to increasing labor market integration, wage determination and monetary integration in Central and Eastern Europe have become key issues in European economic policy making. Based on the Scandinavian model of wage adjustment by Lindbeck (1979), we intend to analyze the role of exchange rates in the wage determination process of the Central and Eastern European countries to identify which exchange rate strategy contributes to faster wage convergence in Europe. Panel estimations reveal a robust negative relationship between exchange rates and wage growth. This suggests that workers in countries with fixed exchange rates are likely to benefit from higher wage increases. Download

2472 Lommerud, Kjell Erik / Straume, Odd Rune: Employment Protection versus Flexicurity: On Technology Adoption in Unionised Firms                       

We analyse how different labour market institutions - employment protection versus flexicurity - affect technology adoption in unionised firms. We consider both trade unions’ incentives to oppose or endorse labour-saving technology, and firms’ incentives to invest in such technology. We find that increased flexicurity – interpreted as less employment protection and a higher reservation wage for workers - unambiguously increase firms’ incentives for technology adoption, even when taking into account the response in unionised wage setting to such new technology. If we assume that unions have some direct influence over the technology to be adopted, a higher reservation wage also makes unions more willing to accept technological change. Less employment protection has the opposite effect, since this increases the downside (job losses) of labour-saving technology. Download

2473 Menkhoff, Lukas: High-Frequency Analysis of Foreign Exchange Interventions: What do we learn?                       

The high-frequency analysis of foreign exchange dynamics is helpful in order to better identify the impact of central bank interventions. Evidence robustly shows that interventions do indeed move the exchange rate level in the desired direction. Interventions increase volatility in the short run as they are regarded as information; but they can reduce volatility overall. Ways of transmission may reach beyond the signaling channel and also include the portfolio balance and a damping channel. Finally, interventions are more successful if they obey certain conditions, such as being coordinated among central banks and going with the market and fundamentals. Download

2474 Poelhekke, Steven / Van der Ploeg, Frederick: Growth, Foreign Direct Investment and Urban Concentrations: Unbundling Spatial Lags                       

Cross-country regressions suggest that urbanization and FDI are important drivers of growth. However, it is not clear that primacy eventually hurts growth performance. Since it is tough to interpret cross-country growth regressions, we provide detailed evidence on the determinants of outward FDI from the US. FDI is higher in countries that are close to the US and have good institutions, well developed financial systems, a high road density, a high income per capita and substantial natural resource exports. Countries also attract more FDI if they have more medium-sized cities and primacy is not too large. We show that good institutions in neighbouring countries are important drivers of FDI. FDI is higher if neighbours suffer from primacy. However, FDI is attracted if surrounding countries have fewer cities, restrictions on international trade and low market potential (income per capita). We tentatively conclude that cities are important drivers of FDI and growth and unbundling spatial lags matters. Robustness is verified by re-estimating our regressions with fixed effects and for the sample of OECD countries. Download

2475 Berger, Helge / Nitsch, Volker: Gotcha! A Profile of Smuggling in International Trade                       

This paper explores official trade data to identify patterns of smuggling in international trade. Our main measure of interest is the difference in matched partner trade statistics, i.e., the extent to which the recorded export value in the source country deviates from the reported import value in the destination country. Analyzing 4-digit product level data for the world’s five largest importers for the period from 2002-2006, we find that the reporting gaps are highly correlated with the level of corruption in both partner countries. This finding supports the hypothesis that trade gaps partly represent smuggling activities. Download

2476 Dur, Robert / Sol, Joeri: Social Interaction, Co-Worker Altruism, and Incentives                       

Social interaction with colleagues is an important job attribute for many workers. To attract and retain workers, managers therefore need to think about how to create and preserve high-quality co-worker relationships. This paper develops a principal-multi-agent model where agents do not only engage in productive activities, but also in social interaction with their colleagues, which in turn creates co-worker altruism. We study how financial incentives for productive activities can improve or damage the work climate. We show that both team incentives and relative incentives can help to create a good work climate. We discuss some empirical evidence supporting these predictions. Download

2477 Nicodème, Gaëtan J.A.: Corporate Income Tax and Economic Distortions                       

As any non-lump-sum tax, corporate income taxation creates distortions in economic choices, reducing its efficiency. This paper reviews some of these domestic and international distortions and their most recent estimates from the economic literature. Distortions originating from income shifting between capital and labour sources, profit shifting across jurisdictions, the effects of taxation on business location and foreign direct investment are the major sources of distortions. Download

2478 Jacob, Martin / Niemann, Rainer / Weiss, Martin: The Rich Demystified - A Reply to Bach, Corneo, and Steiner (2008)

The contribution Bach, Corneo, and Steiner (2008) has argued that “the rich” do not pay taxes adequately in relation to their income, finding, for instance, an effective tax rate of only 38.1% for the 0.001% fractile of German income taxpayers in 2001. This result contrasts sharply with the legislated top marginal income tax rate of 48.5%. We subject the results contained in Bach, Corneo, and Steiner (2008) to a rigorous analysis: We find major flaws and inconsistencies with regard to methodology, i.e. the omission of corporate taxes and inter-temporal aspects of taxation. Restating basic rules for the measurement of effective tax rates, we provide values for what we term the “comprehensive nominal tax rate” (CNTR) and show that the headline result in Bach, Corneo, and Steiner (2008) of 38.1% is underestimated by over 12 percentage points. As an important distributional result, the CNTR increases with increasing taxable income. Download

2479 Carson, Scott A.: Demographic, Residential, and Socioeconomic Effects on the Distribution of 19th Century African-American Stature

The use of height data to measure living standards is now a well-established method in the economic literature, and heights are related with vitamin D. Although African-Americans and whites have the genetic ability to reach similar terminal statures, 19th century blacks were consistently shorter than whites. Greater insolation (vitamin D production), is documented here to be associated with taller black statures. Consistent with the insolation-hypothesis, mulattos were taller than darker pigmented blacks, and most of the mulatto-black stature differential was attributable to age and insolation. Black farmers were taller than workers in other occupations, and black statures increased during the antebellum period and decreased with slavery’s elimination, which is observed across the stature distribution. Download

2480 Heer, Burkhard / Irmen, Andreas: Population, Pensions, and Endogenous Economic Growth

We study the effect of a declining labor force on the incentives to engage in labor-saving technical change and ask how this effect is influenced by institutional characteristics of the pension scheme. When labor is scarcer it becomes more expensive and innovation investments that increase labor productivity are more profitable. We incorporate this channel in a new dynamic general equilibrium model with endogenous economic growth and heterogeneous overlapping generations. We calibrate the model for the US economy. First, we establish that the net effect of a decline in population growth on the growth rate of percapita magnitudes is positive and quantitatively significant. Second, we find that the pension system matters both for the growth performance and for individual welfare. Third, we show that the assessment of pension reform proposals may be different in an endogenous growth framework as opposed to the standard framework with exogenous growth. Download

2481 Aronsson, Thomas / Koskela, Erkki: Optimal Redistributive Taxation and Provision of Public Input Goods in an Economy with Outsourcing and Unemployment

This paper concerns optimal redistributive income taxation and provision of a public input good in a two-type model with a minimum wage policy implemented for the low-ability type, where firms may use some of their resources for outsourcing by locating part of the production process abroad. Our results show that the incentive to relax the self-selection constraint and the incentive to increase employment among the low-skilled reinforce each other in terms of marginal income taxation. In addition, the appearance of equilibrium unemployment also provides an incentive for the government to directly tax outsourcing. Without a direct instrument for taxing outsourcing, the government may reduce the amount of resources spent on outsourcing by increased provision of the public input good, which is desirable in the sense that reduced outsourcing contributes to less wage inequality and increased employment. Download

2482 Winer, Stanley L. / Tridimas, George / Hettich, Walter: Social Welfare and Coercion in Public Finance

This paper develops an expanded framework for social planning in which the existence of coercion is explicitly acknowledged. Key issues concern the precise definition of coercion for individuals and in the aggregate, its difference from redistribution, and its incorporation into normative analysis. We explore modifications to traditional rules for optimal fiscal policy in the presence of coercion constraints and determine the degree of coercion implied by traditional social planning. The paper maps the trade-off between social welfare and aggregate coercion and explores its implications for normative policy and the comparative evaluation of institutions, including competitive democracy. Download

2483 Frey, Bruno S. / Torgler, Benno: Politicians: Be Killed or Survive

In the course of history, a large number of politicians have been assassinated. Rational choice hypotheses are developed and tested using panel data covering more than 100 countries over a period of 20 years. Several strategies, in addition to security measures, are shown to significantly reduce the probability of politicians being attacked or killed: extended institutional and governance quality, democracy, voice and accountability, a well functioning system of law and order, decentralization via the division of power and federalism, larger cabinet size and strengthened civil society. There is also support for a contagion effect. Download

2484 Buettner, Thiess / Riedel, Nadine / Runkel, Marco: Strategic Consolidation under Formula Apportionment

This paper argues that profit-shifting activities of multi-jurisdictional enterprises (MJE) are maintained under a tax system of consolidation and formula apportionment (FA). A theoretical model discusses how an MJE can exploit its impact on the definition of the consolidated group strategically. The analysis shows that the MJE will run individual affiliates as separate un-consolidated firms for tax purposes if intra-group tax-rate differences, and thereby potential gains from profit-shifting, are large. We test this prediction using confidential firm-level tax-return data for the local business tax in Germany. The identification strategy exploits a quasi experiment derived from a major company tax reform in 2001 that reduced the costs associated with separating out individual affiliates. Our results show that, evaluated at the sample mean, an increase in the tax-rate variance among the MJE's affiliates by one standard deviation reduces the number of consolidated affiliates by 20%. Download

2485 Arraiz, Irani / Drukker, David M. / Kelejian, Harry H. / Prucha, Ingmar R.: A Spatial Cliff-Ord-type Model with Heteroskedastic Innovations: Small and Large Sample Results

In this paper we specify a linear Cliff and Ord-type spatial model. The model allows for spatial lags in the dependent variable, the exogenous variables, and disturbances. The innovations in the disturbance process are assumed to be heteroskedastic with an unknown form. We formulate a multi-step GMM/IV type estimation procedure for the parameters of the model. We then establish the limiting distribution of our suggested estimators, and give consistent estimators for their asymptotic variance covariance matrices, utilizing results given in Kelejian and Prucha (2007b). Monte Carlo results are given which suggest that the derived large sample distribution provides a good approximation to the actual small sample distribution of our estimators. Download

2486 Falck, Oliver / Fritsch, Michael / Heblich, Stephan: The Apple doesn't Fall far from the Tree: Location of Start-Ups Relative to Incumbents

New firm location decisions, relative to incumbents may be based on a choice between two types of advantages: natural advantages or those that arise from social embeddedness, the latter of which may particularly include knowledge spillovers. We analyze the relative importance of geographically bounded location factors based on data from 103 manufacturing industries across 327 West German and 111 East German districts. Our micro-geographic analysis reveals that the two parts of the country vary in their pattern of new firm location. In East Germany, only 5 percent of the industries reveal start-up localization patterns beyond what natural advantages would suggest compared to 40 percent in West Germany. Download

2487 Deck, Cary / Schlesinger, Harris: Exploring Higher-Order Risk Effects

Higher-order risk effects play an important role in examining economic behavior under uncertainty. A precautionary demand for saving has been linked to the property of prudence and the property of temperance has been used to show how the presence of an unavoidable risk affects one’s behavior towards a second risk. These two properties also play key roles in aversion to negative skewness and to kurtosis, respectively. Both properties recently have been characterized by preferences over lottery pairs in simple 50-50 gambles. The simplicity of this characterization is ideal for experimental investigation. This paper reports the results of such experiments and concludes that there is behavioral evidence for prudence, but not for temperance. Implications of these results for both expected-utility and non-expected-utility models are examined. Download

2488 Kaganovich, Michael / Meier, Volker: Social Security Systems, Human Capital, and Growth in a Small Open Economy

We consider a small open economy in which the level of public education funding is determined by popular vote. We show that growth can be enhanced by the introduction of pay-as-you-go pensions even if the growth rate of aggregate wages falls short of the interest rate. The reason is that the PAYG system allows future retirees to partially internalize positive externalities of public education due to the positive effect of higher future labor productivity on their pension benefits. The majority support for education funding will be especially strong when the PAYG benefit formula is flat, i.e. progressively redistributive. This means that if a flat benefit PAYG pension system is in place then the economy will achieve the highest growth rate relative to the alternative pension system designs. We argue furthermore that while such PAYG pension system may be opposed by the majority of working individuals due to inferior returns to their pension contributions relative to a funded scheme, it is likely to be politically sustained by the coalition of retirees and lower income workers. Download

2489 Elinder, Mikael / Jordahl, Henrik / Poutvaara, Panu: Selfish and Prospective: Theory and Evidence of Pocketbook Voting

We present and test a theory of prospective and retrospective pocketbook voting. Focusing on two large reforms in Sweden, we establish a causal chain from policies to sizeable individual gains and losses and then to voting. The Social Democrats proposed budget cuts affecting parents with young children before the 1994 election, but made generous promises to the same group before the 1998 election. Since parents with older children were largely unaffected we use a difference-in-differences strategy for identification. We find clear evidence of prospective pocketbook voting. Voters respond to campaign promises but not to the later implementation of the reforms. Download

2490 Bosker, Maarten / Garretsen, Harry: Economic Geography and Economic Development in Sub-Saharan Africa

The physical or absolute geography of Sub-Saharan Africa (SSA) is often blamed for its poor economic performance. A country’s location however not only determines its absolute geography, it also pins down its relative position on the globe vis-à-vis other countries. This paper assesses the importance of relative geography, and access to foreign markets in particular, in explaining the substantial income differences between SSA countries. We base our empirical analysis on a new economic geography model. We first construct a measure of each SSA country’s market access based on bilateral trade flows and then assess the relevance of market access for economic development. In doing so, we explicitly distinguish between the importance of access to other SSA markets and to the rest of world respectively. We find that market access, and notably intra-SSA market access, has a significant positive effect on GDP per capita. This indicates that improving SSA market access (e.g. by investing in intra- SSA infrastructure or through increased SSA integration) will have substantial positive effects on its future economic development. Download

2491 Fischbacher, Urs / Gaechter, Simon: Social Preferences, Beliefs, and the Dynamics of Free Riding in Public Good Experiments

We provide a test of the role of social preferences and beliefs in voluntary cooperation and its decline. We elicit individuals’ cooperation preferences in one experiment and use them – as well as subjects’ elicited beliefs – to explain contributions to a public good played repeatedly. We find substantial heterogeneity in people’s preferences. With simulation methods based on this data, we show that the decline of cooperation can be driven by the fact that most people have a preference to contribute less than others, rather than by their changing beliefs of others’ contribution over time. Universal free riding is very likely despite the fact that most people are not selfish. Download

2492 Hoel, Michael: Bush Meets Hotelling: Effects of Improved Renewable Energy Technology on Greenhouse Gas Emissions

Fossil fuels are non-renewable carbon resources, and the extraction path of these resources depends both on present and future demand. When this "Hotelling feature" is taken into consideration, the whole price path of carbon fuel will shift downwards as a response to the reduced cost of the renewable substitute. An implication of this is that greenhouse gas emissions in the near future may increase as a response to the reduced cost of the renewable substitute. If this is the case, increased climate costs may outweigh the benefits of reduced costs of a substitute, thus reducing overall social welfare. Download

2493 Bruns, Christian / Himmler, Oliver: It's the Media, Stupid - How Media Activity Shapes Public Spending

Politicians seeking reelection need voters to know what they have done for them. Thus, incentives may arise to spend more money where media coverage is higher. We present a simple model to explain the allocation of public spending across jurisdictions contingent on media activity. An incumbent seeking to maximize the probability of reelection will shift more money to jurisdictions where an extra dollar gains more votes because a larger share of the electorate is informed about his policy. This prediction is tested using US data on county-level public spending, Designated Market Areas (DMAs) and location of licensed television stations. Instrumenting for the possible endogeneity of media activity to public spending, 2SLS results confirm a positive effect of media coverage on county-level public spending. Spatial regression rules out the possibility of confounding media effects with spatial autocorrelation. Download

2494 Knabe, Andreas / Schöb, Ronnie: Minimum Wages and their Alternatives: A Critical Assessment

Do minimum wages reduce in-work-poverty and wage inequality? Or can alternative policies do better? We evaluate theses issues for the exemplary case of Germany that suffers from high unemployment among low-skilled workers and rising wage dispersion at the bottom of the wage distribution. We analyze the impact of three different policy options, currently discussed in Germany, on employment, wage inequality, public expenditures, and incomes of poor households: 1) a statutory minimum wage, 2) a combination of minimum wages and wage subsidies as e.g. in France and the Netherlands, and 3) pure wage subsidies to low-paid workers. We find that a minimum wage of EUR 7.50 would cost 840,000 low-paid jobs and increase the fiscal burden by about EUR 4 billion per year, while poor households’ income rises only by EUR 1.1 billion per year. With pure wage subsidies, the government can ensure more favorable employment and income effects. Combining a minimum wage with a wage subsidy turns out to be extremely costly and inferior to wage subsidies in all respects. Download

2495 Becker, Sascha O. / Egger, Peter / Von Ehrlich, Maximilian / Fenge, Robert: Going NUTS: The Effect of EU Structural Funds on Regional Performance

The European Union (EU) provides grants to disadvantaged regions of member states to allow them to catch up with the EU average. Under the Objective 1 scheme, NUTS2 regions with a GDP per capita level below 75% of the EU average qualify for structural funds transfers from the central EU budget. This rule gives rise to a regression-discontinuity design that exploits the discrete jump in the probability of EU transfer receipt at the 75% threshold. Additional variability arises for smaller regional aggregates - so-called NUTS3 regions - which are nested in a NUTS2 mother region. Whereas some relatively rich NUTS3 regions may receive EU funds because their NUTS2 mother region qualifies, other relatively poor NUTS3 regions may not receive EU funds because their NUTS2 mother region does not qualify. We find positive growth effects of Objective 1 funds, but no employment effects. A simple cost-benefit calculation suggests that Objective 1 transfers are not only effective, but also cost-efficient. Download

2496 Dur, Robert: Gift Exchange in the Workplace: Money or Attention?

We develop a model of manager-employee relationships where employees care more for their manager when they are more convinced that their manager cares for them. Managers can signal their altruistic feelings towards their employees in two ways: by offering a generous wage and by giving attention. Contrary to the traditional gift-exchange hypothesis, we show that altruistic managers may offer lower wages and nevertheless build up better social-exchange relationships with their employees than egoistic managers do. In such equilibria, a low wage signals to employees that the manager has something else to offer — namely, a lot of attention — which will induce the employee to stay at the firm and work hard. Our predictions are well in line with some recent empirical findings about gift exchange in the field. Download

2497 Carson, Scott A.: Nineteenth Century Black and White US Statures: The Primary Sources of Vitamin D and their Relationship with Height

Vitamin D is vital in all vertebrates because it allows them to absorb more calcium from their diets, contributing to stronger skeletal systems and stature growth. Using a new source of 19th century US state prison records, this study contrasts the statures of comparable African-Americans and whites by the primary sources of vitamin D production: time exposed to solar radiation, skin pigmentation, and nativity. Greater insolation (vitamin D production) is documented here to be associated with taller black and white statures, and a considerable share of the stature differential by socioeconomic status was related to insolation. Download

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