This paper studies the general equilibrium implications of two types of educa-tion policy in an overlapping generations growth model with second-best policy. We examine vouchers, which augment inherited private education spending, and public investment on economy-wide human capital, that provides economy-wide externalities to individual human capital accumulation. The government deter-mines jointly the allocation of tax revenues among the two types of education policy and tax policy, subject to the competitive decentralized equilibrium. Using plausible parameter values it is shown that it is socially optimal to spend heavily on economy-wide human capital accumulation and finance government spending by a modest proportional tax on initial human capital and a low tax on inherited private education expenditures.
The impact of local government spending on output growth is estimated using a panel of Brazilian municipalities during 1985–1994. Attention is focused on three expenditure categories, housing/urbanization, health/sanitation, and transport services, which are expected to be growth-enhancing, and their sources of finance (local taxes, intergovernmental transfers, and borrowing). The determinants of these spending categories are also examined. The size of the municipality, measured by the resident population, is shown to affect government spending nonlinearly. This is a contribution to the recent empirical literature on the linkages between decentralized government spending, public finances, and economic growth at the local, rather than national, level.
We reexamine the properties of optimal fiscal policy and their implications for implementable capital accumulation. The setup is a standard endogenous growth model with public production services, augmented by elastic labor supply. We show that, when a benevolent government chooses a distorting income tax rate to finance public production services by taking into account the competitive decentralized equilibrium, public production services can no longer play their traditional role as an engine of long-run endogenous growth. This follows from a simple combination of Ramsey second-best fiscal policy and endogenous labor/leisure choices.
We analyze Georgian education finance and show that it is embedded in the overall structure of Georgian rayon finances, reflecting all their weaknesses: inequalities, lack of transparency, unmanageability, room for corruption. The budgetary and political independence of rayons is very limited. The steep fiscal inequalities between rayons are only partially and ineffectively addressed by the system of transfers. The transfers moreover are heavily negotiated and non-transparent. Thus education finances depend on general income of the rayons, which effectively determines the level of financing. At the same time, however, the role of the rayons in the management of the sector is very limited. The actual spending patterns for Georgian general education schools are very closely related to per capita income of the rayons without the transfers (about 75% of education spending), and to student teacher ratio (about 25% of education spending). The dependence of the education system on rayon wealth is our main empirical finding, and it contradicts widespread belief among Georgian education professionals. It is not surprising therefore that the education sector in poorer and in mountainous rayons with very low student teacher ratio has to adapt to this situation. It responds by reducing the number of teachers per class, thus lowering standards of service delivery despite high per student costs. The first step required to change this situation is to increase budgetary independence and education management role of rayons. Without strong local governments it will not be possible to decentralize Georgian education. Moreover the influence of fiscal inequalities on education finance should be broken by taking it out of general rayon income and by basing it on a per student education grant to rayons (education subvention). This would lead to significant redistribution of public funds in Georgia. Such a move needs to be carefully prepared. It is necessary to subject education subvention to buffer mechanisms, in order to protect rayons from drastic changes to their present education spending patterns. Moreover, Georgia should begin thinking about a per student formula for education subvention, which recognizes unavoidable higher per student costs of providing education in different geographical and social settings.
This paper presents a general-equilibrium model where human capital investment increases specialization and exposes skilled workers to region-specific earnings risk. Interjurisdictional mobility of skilled labor mitigates these risks; state-contingent migration of skilled labor also improves efficiency. With perfect capital markets, labor-market integration raises welfare and reduces ex post earnings inequality. If instead human capital investment can only be financed through local taxes, labor-market integration leads to interjurisdictional fiscal competition, shifting the burden of taxation to low-skilled immobile workers. Decentralized public provision of human capital investment creates earnings inequalities and is inefficient. (JEL H00)
Through analyzing the softness and hardness of budgeting constraints in research and development (R&D) investment under different institutions, we develop a theory of optimal R&D financing. Our theory not only provides a clear comparison of investment efficiency between centralized economies and market economies but also extends the analysis of soft budget constraints to firms in market economy. Based on this theory, we characterize optimal choices of R&D project financing in centralized and decentralized economies. Our results explain why some projects are financed internally by a large firm but others are cofinanced externally by several firms. We also explain what makes a centralized economy inefficient in R&D.
We propose a two factor endogenous growth model in which the government intervenes in the economy by financing research and/or education. We allow technology in public production to be different from technology in private production, so that public spending has a direct effect on the rental prices of factors. We characterize both the unique balanced growth path and the transitional dynamics of the model showing the steady state equilibrium to be a saddle point. We also show that while income taxation is distortive, in general, a Pareto optimal outcome can be reached by means of a consumption tax in the decentralized setting.
Government financing of schooling is necessitated by capital market imperfections. Governments are also res ponsible for maintaining a stock of public capital that enters private production function. In this paper the welfare implications and politics of these investments are examined in a version of Diamond (1965) growth model. It is argued that in decentralized environments where the working generation is decisive each period significant underinvestment in both schooling and in frastructure will be observed relative to the Ramsey equilibrium.
The author examines the many faces of infrastructure decentralization: the costs and benefits, the government structure (constraint or variable?), the"polycentric"approach, and how to make decentralization work (for whom?). He proposes basic principles and guidelines for policy design, for both small projects and large. Broadly, these guidelines are summed up in a few propositions. In all countries, some critical infrastructure is provided through a decentralized political structure. Current trends make that likely to be more true in the future. Decentralization, however defined, in and of itself had no necessary implications for good or evil so far as infrastructure is concerned: its effects depend on the incentives various decisionmakers face. The key to ensuring that these incentives are conducive to"good"decisions (about design, siting, timing, finance, pricing, operation, maintenance, and use of infrastructure) is to ensure that those who made the decisions bear the financial (and political) consequences, as much as possible. Politically, this means that political leaders at all levels should be responsive and responsible to their constituents, and that those constituents are fully informed about the consequences of all decisions. Making politicians bear the consequences of their own mistakes is as close as one can get to a"hard"political budget constraint. Economically, it must be difficult for local residents to shift cost to nonresidents who do not receive benefits and to make local decisionmakers fully responsible to their citizens for the use they make of revenues collected from them (through local taxes), to users of infrastructure (local or otherwise) for the use made of the revenues they contribute (through user charges of various sorts), and to taxpayers in general for the use made of any transfers (or subsidized loans) they receive. Administratively, what such a system requires is a clear set of"framework"laws (on local budgeting, financial reporting, taxation, contracting, dispute settlement, rules to be followed in designing user charges and so on), as well as adequate institutional support for localities to operate in this environment. To the extent that these conditions are not met, the perverse incentives that too often exist because of the structure and finance of the public sector in many countries will probably be exacerbated by the current tendency to decentralize more and more decisions in the public sector.
The decentralization of government in Eastern Europe represents a reaction both from below (to tight central political control) and from above (to privatize the economy and relieve the central government's fiscal stress). In all transitional economies, the developing structure of intergovernmental relations is intimately related to such critical policy issues as privatization, stabilization, and the social safety net. In the fiscal sphere, tax reform, deficit control, and intergovernmental finance are a tripod. Unless each leg is set up properly, the whole structure could collapse. The present strategy of devolving expenditures downward while holding back on revenue flows and transfers to balance the central budget is unlikely to succeed for more than a year or two at best. Net spending reductions at the subnational level may be difficult to achieve. From 10 to 40 percent of outlays go to the subnational sector, and in many countries local governments provide much of the social safety that makes the pain of the economic transition politically tolerable. And, most housing and many enterprises have been shifted to local ownership, with the maintenance and subsidy cost this implies. Since the revenue sources assigned to local governments cannot finance expected levels of local activity, the result of shifting spending downward is likely to be strong demands for increased, rather than decreased, transfers. Alternatively, subnational government may look to coping mechanisms such as holding on to their enterprises (which provide vital social services), developing extrabudgetary revenues, or borrowing. These coping mechanisms threaten privatization, reduce budgetary transparency, and impede stabilization policies. The authors describe the risks to privatization, to macroeconomic stability, and to an adequate social safety net that present policies toward local government may imply. Its themes are that the subnational sector needs to be more realistically factored into national plans - and that subnational expenditures be more clearly assigned and revenue needs more realistically assessed. Such assessments are likely to acknowledge a larger sphere for subnational governments and the need for access to more robust revenue sources. Giving local government a share in the personal income tax is one possible and perhaps desirable approach to meeting these revenues needs. Careful attention needs to be paid to the design and implementation of the intergovernmental fiscal transfers likely to remain prominent features of the intergovernmental landscape for years to come. Caution is also needed on borrowing by subnational government. Consolidating and integrating extrabudgetary funds at the subnational (and national) levels is crucial to enhanced budgetary transparency and macrostability.
In the 1980's, in the US across the board, domestic manufacturers have have faced foreign competition with an increased disadvantage with imports. Domestic businesses, including those in rural areas, have had to struggle with restructuring their businesses, decentralizing them, outsourcing, relocating overseas, go out of business altogether or to reduce their business size or workforce numbers. Economic initiatives like 'Growing North Dakota' attempted to educate North Dakota citizens to the necessity of their state increasing it's growth in manufacturing and in ways they could help these industries grow such as financing these industries at favorable terms, aiding in the transfer of technology commercialization or assisting such technologies. By aiding the manufacturing sector this was deemed as aiding in the diversification of the North Dakota economy.
The feasibility of the policy of perpetual debt financing, given a particular path for expenditures and taxation, has been questioned over the years. Sargent and Wallace [17] argue that such a policy is not feasible in the sense that the debt/GNP ratio will explode. McCallum [8] and Darby [2] argue that this policy will be feasible if and only if the long-run growth rate of GNP exceeds the after-tax real interest rate. This particular condition was derived under the assumption of Ricardian equivalence, where the growth rate of GNP and the interest rate are exogenously given, and are not affected by the path of debt. Miller and Sargent [9] and Weil [20] make the point that once the assumption of Ricardian equivalence is dropped, then simple comparisons of long-run growth rates and interest rates are not sufficient to determine stability. Tirole [19] and O'Connell and Zeldes [10] demonstrate in Diamond's [3] model, without Ricardian equivalence, that Ponzi games such as this are feasible if and only if the economy is dynamically inefficient without debt. All of these studies assume that the long-run growth rate of GNP is exogenously given. This assumption is particularly strong in the absence of Ricardian equivalence. In a separate literature, a new generation of equilibrium growth models has recently been developed with positive sustained growth in the long-run equilibrium. In these models, long-run growth is endogenously determined, rather than being imposed on the model as some exogenously given process [7; 11; 12; 14; 15].1 All of these models find some way of introducing increasing returns to scale into the neoclassical growth model and yet preserving the fact that it can be interpreted as a decentralized equilibrium. This paper considers the feasibility of perpetual debt financing in an economy where the growth rate of GNP is endogenously determined and is a function of debt levels. The model of endogenous growth presented here is a modified version of the one given in Prescott and Boyd [12]. This particular model is chosen for two reasons. First, agents live for finite lengths of time; so Ricardian equivalence will not hold, in general, in this model. Also, the production function is linear in the capital stock; as will become clear below, this implies that the equilibrium paths of the state variables can be characterized as first order linear difference equations.
The case is strong for declaring an inadequacy of export finance for small business. In 1988–90, the documentation has expanded beyond that of academic research and claims by the Small Business Administration to Congressional testimony by exporters and bankers, surveys by trade associations of manufacturers and bankers, and investigations by the Government's export finance agency as well as our central bank. Nonetheless, small business is exhorted to look abroad in its marketing efforts and so to participate in reducing the U.S. trade deficit. As one means of alleviating this international marketing challenge, the Export‐Import Bank of the United States (Eximbank) has moved to convert a pilot program of 1988–89 into a fall‐fledged decentralized effort to deliver export finance to qualified small firms. The intention is that carefully trained administrators in selected states will be able to match qualified exporters with financial institutions and thereby assure that the small firms receive working capital in adequate quantity to meet terms and conditions of an export contract. While Eximbank's staff is poised to support the marketing and credit analysis work of the state/local administrators, this paper examines the need for a fully cooperative effort among four parties or groups in the face of a national retrenchment by many banks in the provision of export finance for small firms.
The authors study an economy where externalities provide an explicit role for intervention and technology shocks generate aggregate uncertainty. In laissez-faire there is too much unemployment. However, the authors show how to support the optimal allocation as a decentralized equilibrium using a self-financing linear employment subsidy. Generally, this subsidy is a function of economic conditions, and they characterize the way in which it varies with the shock. A special case of the authors' results indicates that a simple restriction on technology, homotheticity, implies the optimal subsidy is constant or independent of unemployment. Copyright 1991 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.
Economists and policy makers have always argued that the patent system is necessary for a growing economy despite the fact that temporary monopoly rights to innovators imply a distortion of the price system. However, economists have not yet come up with a unified theory to determine the optimal duration of patents. In this paper, we develop a simple dynamic model which identifies two important welfare effects of the patent system, the effect on the incentive to innovate and that of the price distortion caused by the monopoly rights of patent holders. Using this framework, we analyze the factors which determine the optimal duration of patents awarded to new product developers. We argue that the possibility of a finite optimal patent life does not arise in the literature on product development since it considers only a constant returns to scale technology for developing new products. We first confirm the optimality of an infinite patent life for this technology and then show that if the cost of developing new products is increasing with the rate of instantaneous product development then the optimal patent life for economies with a population growth rate less than the interest rate is finite. In addition, we show that for economies with population growth rate exceeding the interest rate, the optimal patent life may also be finite provided that the degree of product substitution is sufficiently high. The patent system can be viewed as a method of assigning property rights to innovators in order to encourage research and development. Theoretically, the optimal R&D level can be tackled using a standard public goods analysis (such as the problem of financing a new bridge) yielding a result that optimal allocations can be achieved at the cost of a significant amount of government intervention. Perhaps for this reason most decentralized societies have chosen a different way to motivate people to engage in R&D, and this is done by assigning temporary monopoly rights to innovators.
The main purpose of this paper is to analyze problems of financing an old-age insurance when birth rates are low and population declines or fertility fluctuates with time. A government then searches for optimal policies to cope with such problems. A first criterion could be seen in the Pareto principle. But we all know that there is no way out of PAYG unless at least one generation has to pay for the transition. Therefore an optimal policy is concerned with intergenerational redistribution and optimal growth. In the absence of public pensions the economy will in the long run converge to a steady state which is not optimal in the sense of a golden rule. This dynamic "in"-efficiency results from the decentralized decision making by the consumers and the firms. If the PAYG system influences the savings ratio of the economy, public pensions can be seen as an instrument to implement a modified golden rule.