Working papers results
The primary objective of this paper is to develop a political economy of public funding of education that accounts for the large disparities observed across countries in the share of GNP allocated to public education. In a general equilibrium overlapping generations model in which parents care about their childrens lifetime utility the rational and forward looking agents vote for a level of public funding of education. The model mirrors the observed cross-country disparities in the share of GNP allocated to public funding of education. This share increases with per capita income levels as well as with the fertility rate and it decreases with the degree of inequality in the economy. For higher levels of inequality the model can generate a politico-economic equilibrium where private and public investment on education coexist. In contrast to existing theories the paper does not assume that the factor prices are invariant and I study the importance of the effects of an education policy on the factor prices in the determination of the equilibrium level of this policy.
In this paper we analyze how the creation of a single currency regime changes the strategic relationship between policy makers, both within and across countries. in particular we look at the role of cross-country externalities and lack of commitment. When labor taxation is excessive, due to terms of trade externalities, the ECB may be tempted to raise inflation above the flexible exchange rate equilibrium in order to induce governments to substitute seignorage for income taxes. Therefore the equilibrium rate of inflation in EMU typically exceed the flexible exchange rate level. When the ECB cannot credibly commit to inflation, multiple equilibria may arise, where inflation is excessive and labor taxes too low (Workers Europe), or viceversa, where taxation is excessive and inflation too low(Bankers Europe). Finally, if the ECB cannot commit to a fixed scheme for redistributing seignorage, the outcome is excess inflation and suboptimal taxation. Both governments anticipate that the ECB will redistribute seignorage in favor of the country with lower tax revenue, and tend to lower tax rates accordingly.
The delegation of monetary policy to a supranational central bank creates a conflict of interest between residents of different countries. For example, the country in recession may favor more inflation to boost output, while the country in boom prefers exactly the opposite.This conflict gives rise to an adverse selection problem. Provided each government has private information about the current state of the economy, it may try to exploit it in order to shift the common monetary policy to his own preferred way. The paper shows that problems of this kind can generate both an inflation and primary deficit bias (in line with the worries of Workers Europe addressed by the "stability pact") as well as an excess monetary discipline and recession bias (in line with the worries addressed by the Bankers Europe concern).When information problems are particularly severe, monetary and fiscal policy becomes relatively insensitive to business cycle conditions, and too little "smoothing" is done over the business cycle.
Voting Theory generally concludes that -in first-past-the-post elections- 1) All voters should go to effective candidates (Duvergers Law); 2) Parties platform should converge (Median Voter Theorem). Observations, though, suggest that such predictions are not met in practice. We show that divergence and dispersion of votes is a natural election outcome when there is uncertainty and repetition of elections. "Voting for Losers" increases the informational content of elections, and forces main parties to relocate towards extremists. As a result, they maximize their probability of being elected, not by converging to the median but by diverging to a certain extent. Ideological behavior results then from optimizing considerations alone.
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Oxford Economic Papers, forthcoming, 1999.
Aggregate data from the regions of Southern Italy are used to test whether risk is a significant determinant of the decision to migrate abroad or inside the country. This indeed appears to be the case for both foreign and domestic migrations, after controlling for unemployment and wage differentials and other plausible control variables. We interpret our results as evidence that, whereas financial markets are absent or malfunctioning, migration provides a shelter against uncertain income prospects.
In spite of ongoing dramatic changes in labor market structure, we present statistical evidence that transitional economies display rather low worker flows across sectors and occupations. Such low mobility can be explained by low returns to job changes as well as by market segmentation in the allocation of job offers. We develop an econometric model which enables us to characterize intertemporal changes in probabilities of dismissal, remuneration, and offer arrival rates on the basis of information on observed transitions and wage payments. The model is estimated using data from the Polish Labor Force Survey. Our results indicate a significant degree of segmentation in the allocation of job offers, more stability in public sector versus private sector jobs, and little, if any, rewards to tenure and age in the private sector. These findings support explanations for low mobility in transitional economies, which are based on informational failures, notably that fact that job offers do not reach those who are most prone to take up jobs, and that moving from public to private enterprises is costly, especially for those with high levels of job tenure and labor market experience in the public sector.
To the layman, the upward trend in European unemployment is related to the slowdown in economic growth. We argue that the laymans view is correct. The increase in European unemployment and the slowdown in economic growth are related, because they stem from a common cause: an excessively high cost of labor. In Europe, labor costs have gone up for many reasons, but one is particularly easy to identify: higher taxes on labor. If wages are set by strong and centralized trade unions, an increase in labor taxes is shifted onto higher real wages. This has two effects. First, it reduces labor demand, and thus creates unemployment. Second, as firms substitute capital for labor, the marginal product of capital falls ; over long periods of time, this in turn diminishes the incentive to accumulate and thus to grow. Thus high unemployment is associated to low growth rates. The model also predicts that the effect of labor taxation differs sharply in countries with different labor market institutions. We test these predictions on data for 14 industrial countries between 1965 and 1991, and find striking support for them. In particular, labor taxes have a strong positive effect on unemployment only in Europe and not in other industrial countries. The observed rise of 9.4 percentage points in labor tax rates can account for a reduction of the EU growth rate of about 0.4 percentage points a year - about one third of the observed reduction in growth between 1965-75 and 1976-91 - and a rise in unemployment of about 4 percentage points.
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Handbook of Monetary Economics, Vol. III, Ed. by J. Taylor and M. Woodford, North Holland, 1998
This paper surveys the recent literature on the theory of macroeconomic policy. We study the effect of various incentive constraints on the policy making process, such as lack of credibility, political opportunism, political ideology, divided government. The survey is organized in three parts: Part I deals with monetary policy in a simple Phillips curve model, and focuses on credibility, political business cycles, and optimal design of monetary institutions. Part II deals with fiscal policy in a dynamic general equilibrium set up; the main topics covered in this section are credibility of tax policy, and political determinants of budget deficits. Part III studies economic growth in models with endogenous fiscal policy.