Public Goods and Bads
When good evidence goes bad: The weak evidence effect in judgment and decision-making
Philip Fernbach, Adam Darlow & Steven Sloman
Cognition, forthcoming
Abstract:
An indispensable principle of rational thought is that positive evidence should increase belief. In this paper, we demonstrate that people routinely violate this principle when predicting an outcome from a weak cause. In Experiment 1 participants given weak positive evidence judged outcomes of public policy initiatives to be less likely than participants given no evidence, even though the evidence was separately judged to be supportive. Experiment 2 ruled out a pragmatic explanation of the result, that the weak evidence implies the absence of stronger evidence. In Experiment 3, weak positive evidence made people less likely to gamble on the outcome of the 2010 United States mid-term Congressional election. Experiments 4 and 5 replicated these findings with everyday causal scenarios. We argue that this "weak evidence effect" arises because people focus disproportionately on the mentioned weak cause and fail to think about alternative causes.
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Daniel Diermeier & Pohan Fong
Social Choice and Welfare, April 2011, Pages 565-589
Abstract:
This article presents a theory of government expenditure and identifies how an inefficient government budget is shaped by its initial size and allocation. Assuming that the parties in the legislative body agree with the optimal size of a government budget but have conflict of interests over its allocation, we show that, if the initial budget size is sufficiently large and the initial allocation is sufficiently unequal, in equilibrium the budget size is greater than what it would be had the initial budget size been sufficiently small.
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The Effects of State Budget Cuts on Employment and Income
Jeffrey Clemens & Stephen Miran
Harvard Working Paper, August 2010
Abstract:
Balanced budget requirements lead to substantial pro-cyclicality in state government spending outside of safety-net programs. When recessions begin, states experience unexpected deficits. While all states ultimately pay these deficits down, the stringency of their balanced budget requirements dictates the pace at which they adjust. States with strict rules enact large rescissions to their budgets during the year in which an adverse shock occurs; states with weak rules make up the difference during the following years. We use this variation to identify the impact of mid-year budget cuts on income and employment. Our baseline estimates imply i) a state-spending multiplier of 1.7 and ii) that avoiding $25,000 in mid-year cuts preserves one job. These cuts are associated with shifts in the timing of government expenditures rather than differences in total spending over the course of the business cycle. Our results are thus informative about the potential gains from smoothing the path of state government spending. They imply that states could reduce the amplitude of business-cycle fluctuations by 15% by completely smoothing their capital spending and service provision outside of safety-net programs.
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Was the New Deal Contractionary?
Gauti Eggertsson
American Economic Review, forthcoming
Abstract:
Can government policies that increase the monopoly power of firms and the militancy of unions increase output? This paper studies this question in a dynamic general equilibrium model with nominal frictions and shows that these policies are expansionary when certain "emergency" conditions apply. These emergency conditions - zero interest rates and deflation - were satisfied during the Great Depression in the United States. Therefore, the New Deal, which facilitated monopolies and union militancy, was expansionary according to the model. This conclusion is contrary to the one reached by a large previous literature. The main reason for this divergence is that the current model incorporates nominal frictions and the zero bound on the short term interest rate, so that inflation expectations play a central role in the analysis. The New Deal has a strong effect on inflation expectations in the model, changing excessive deflation to modest expected inflation, thereby lowering real interest rates and stimulating spending.
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Do Rising Top Incomes Lift All Boats?
Dan Andrews, Christopher Jencks & Andrew Leigh
B.E. Journal of Economic Analysis & Policy, January 2011
Abstract:
Pooling data for 1905 to 2000, we find no systematic relationship between top income shares and economic growth in a panel of 12 developed nations observed between 22 and 85 years. After 1960, however, a one percentage point rise in the top decile's income share is associated with a statistically significant 0.12 point rise in GDP growth during the following year. This relationship is not driven by changes in either educational attainment or top tax rates. If the increase in inequality is permanent, the increase in growth appears to be permanent. However, our estimates imply that it would take 13 years for the cumulative positive effect of faster growth on the mean income of the bottom nine deciles to offset the negative effect of reducing their share of total income.
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Does philanthropy reduce inequality?
Indraneel Dasgupta & Ravi Kanbur
Journal of Economic Inequality, March 2011, Pages 1-21
Abstract:
Wealthy individuals often voluntarily provide public goods that the poor also consume. We show that, rather than reducing it, such philanthropy may aggravate absolute inequality in welfare achievement, while leaving the change in relative inequality ambiguous. Additionally, philanthropic preferences may increase the effectiveness of policies to redistribute income, instead of weakening them. Our results thus suggest that philanthropy and direct redistribution may often be better viewed as complements, rather than substitutes, in the context of inequality reduction. In so doing, they also bring into question the general normative case for large tax deductions for charitable contributions.
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Omnibus or not: Package bills and single-issue bills in a legislative bargaining game
Johanna Goertz
Social Choice and Welfare, April 2011, Pages 547-563
Abstract:
Legislators sometimes pass unrelated issues in one bill with one vote (omnibus bills), but they often vote separately on different issues as well. In this article, a model is considered in which the first mover chooses whether to bargain over an omnibus bill or several separate bills. The main difference between the two types of bills is that trade-offs between issues are possible with omnibus bills, but not with separate bills. The underlying bargaining game is demand-bargaining (Morelli 1999). In this game, moderate legislators prefer to propose single-issue bills; extreme legislators prefer omnibus bills, if the asymmetry in policy ideal points in the legislature is large enough.
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The Antitrust Consumer Welfare Paradox
Barak Orbach
Journal of Competition Law & Economics, March 2011, Pages 133-164
Abstract:
"Consumer welfare" is the only articulated goal of antitrust law in the United States. It became the governing standard following the 1978 publication of Robert Bork's The Antitrust Paradox. The consumer welfare standard has been instrumental to the implementation and enforcement of antitrust laws. Courts believe they understand this standard, although they do not bother to analyze it. Scholars hold various views about the desirable interpretations of the standard and they selectively use random judicial statements to substantiate opposite views. This article introduces the antitrust consumer welfare paradox: it shows that, under all present interpretations of the term "consumer welfare," there are several sets of circumstances in which the application of antitrust laws may hurt consumers and reduce total social welfare. This article shows that, when Bork used the term "consumer welfare," he obscured basic concepts in economics. This article clarifies that the antitrust methodology permits only surplus analysis and does not accommodate welfare analysis. It explains the conceptual differences between the terms "surplus" and "welfare" and the relevant implications. This article further explains the differences between two other competing standards - "consumer surplus" and "total surplus" - that presently serve as proposed interpretations for the term "consumer welfare." Each interpretation has some limitations and the necessary analytical progress calls first for conceptual clarity. This article argues that whatever good ends the "consumer welfare" phrase may have once served, antitrust law should now lay it to rest.
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The futile quest for a grand explanation of long-run government expenditure
Dick Durevall & Magnus Henrekson
Journal of Public Economics, forthcoming
Abstract:
This paper carries out a critical reappraisal of the two contending theories purporting to explain long-run government spending: Wagner's Law and different variants of the ratchet effect. We analyze data spanning from the early 19th century until the present day in Sweden and the United Kingdom. Hence, in contrast to previous studies, we evaluate the validity of Wagner's Law and the ratchet effect hypothesis over a very long time period, starting at the beginning of industrialization. Cointegration analysis is used to investigate the long-run relationships between government expenditure and GDP, focusing on sub-periods and structural breaks. Moreover, we test the ratchet effect hypothesis by estimating models which allow for asymmetric adjustment. According to our main results, Wagner's Law does not hold in the long run, although the data are consistent with Wagner's Law between roughly 1860 and the mid 1970s. This can be traced to the formation of the modern public sector, including the introduction of public education, health care, and so forth. Yet Wagner's Law did not hold during the initial industrialization phase (before 1860), and in recent periods GDP only affects the government spending share when we control for population age structure. Finally, we find some evidence of asymmetric adjustment in the UK, particularly in the post-WWII period. However, the ratchet effect is not a general cause of the growth of government spending.
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Income Distribution, Search and Market Efficiency
Avi Simhon & Arthur Fishman
B.E. Journal of Economic Analysis & Policy, January 2011
Abstract:
This paper explores the relationship between income distribution, prices, production efficiency and aggregate output in a decentralized search economy. We show that income distribution determines how competitive prices are and thereby affects production efficiency and aggregate output. It is shown that, under reasonable assumptions, it is possible to engineer a judicious transfer of income from high to low income individuals, which increases income equality, leads to more competitive prices, and increases aggregate output.
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Outcomes, Process, and Trust of Civil Servants
Gregg Van Ryzin
Journal of Public Administration Research and Theory, forthcoming
Abstract:
The contemporary performance movement has tended to assume that a key to restoring public trust in civil servants lies in a focus on outcomes or results. But there is growing evidence from various fields that trust in people and institutions of authority often depends more on process (such as fairness and equity) than on outcomes. This finding that process matters in the formation of trust judgments appears across a wide range of settings (police, courts, work places), yet it has not been adequately recognized in the public administration literature and rhetoric on government performance-especially in an era of outcomes-based, results-driven government. Using data from the International Social Survey Program (ISSP), the World Bank Governance Indicators, and the UN Human Development Index, this article empirically examines the relative influence of process versus outcomes on the perceived trustworthiness of civil servants. Individual-level structural equation models are tested for the United States as well as all 33 countries in the ISSP. Country-level path models are tested using both World Bank/UN indicators and aggregated ISSP survey data. Results show that process has a consistently large effect on trust of civil servants, in some models several times larger than the effect of outcomes on trust. Although it has methodological limitations, this study should at least encourage more theoretical and empirical attention to government process, and not just outcomes, as a factor in explaining citizens' trust of civil servants.
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Optimal Compensation for Regulatory Takings
Paul Pecorino
American Law and Economics Review, forthcoming
Abstract:
I develop a model in which there are two groups in society, one of which bears all the costs of a regulation that provides (potentially unequal) benefits to both groups. Absent compensation, a biased government will not choose the efficient level of regulation. If taxes are nondistorting, a compensation rule can be designed to achieve the first best outcome. The optimal rule always involves a positive degree of compensation regardless of the direction of the government bias. When taxes are distortionary, the first best outcome cannot be achieved, and the optimal level of compensation may be zero.
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Lenahan O'Connell & Juita-Elena (Wie) Yusuf
International Journal of Public Administration, February 2011, Pages 180-189
Abstract:
This article offers an information model for educating the public on the rationale for a tax increase. It argues that citizens exposed to two types of information-a need narrative and an anchor value-are more willing to support a tax increase. The applicability of the model is illustrated with two examples in which the model was used to structure the presentation of information. In both situations, exposure to the specific types of information suggested by the model is associated with support for a tax increase. The conclusion relates the model to the findings of previous research on the attributes of successful referenda campaigns for tax increases.