2009 Working Papers
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Working Paper Number 09-15
Dynamic Panel Data Models Featuring Endogenous Interaction and Spatially Correlated Errors
Jan P.A.M. Jacobs, Jenny E. Ligthart, Hendrik Vrijburg, October 2009
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We extend the three-step generalized methods of moments (GMM) approach of Kapoor, Kelejian, and Prucha (2007), which corrects for spatially correlated errors in static panel data models, by introducing a spatial lag and a one-period lag of the dependent variable as additional explanatory variables. Combining the extended Kapoor, Kelejian, and Prucha (2007) approach with the dynamic panel data model GMM estimators of Arellano and Bond (1991) and Blundell and Bond (1998) and supplementing the dynamic instruments by lagged and weighted exogenous variables as suggested by Kelejian and Robinson (1993) yields new spatial dynamic panel data estimators. The performance of these spatial dynamic panel data estimators is investigated by means of Monte Carlo simulations. We show that di_erences in bias as well as root mean squared error between spatial GMM estimates and corresponding GMM estimates in which spatial error correlation is ignored are small.
Working Paper Number 09-14
Urbanization and the Poverty Level
Jorge Martinez-Vazquez, Panupong Panudulkitti, and Andrey Timofeev, August 2009
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This paper analyzes the effect of urbanization level on the poverty level. Our theoretical model suggests a U-shape relationship between the level of urbanization and poverty. Empirically, we estimate the optimal level of urbanization by using: (i) an instrumental variable approach in the framework of the generalized method of moments and (ii) a dynamic panel analysis approach. We also investigate the robustness of the impact of urbanization on the poverty level by examining a variety of linkages. The empirical analysis covers different regions of the world to study whether the magnitude of the urbanization effects varies across regions. Our results support the hypothesis that there exists a U-shape relationship between the level of urbanization and poverty reduction.
Working Paper Number 09-13
Decentralization Measures Revisited
Jorge Martinez-Vazquez and Andrey Timofeev, August 2009
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For the last half of a century, economists in an ever growing literature have been trying to measure decentralization with the purpose of using that measure as either the dependent or an independent variable in their empirical models. The suggested measures essentially boil down to a few concepts: locally raised own revenues, autonomy on expenditure decisions, locally spent national grants, or the number and size of local units. These basic components have entered decentralization measures in various functional forms: additive, multiplicative, in powers, and various mixes of those. This paper revisits these measures and our main finding is that aggregating those distinct dimensions of decentralization into a single indicator inevitably leads to a loss of information. We conclude that in a multivariate framework the distinct aspects of decentralization should enter regression analyses separately, in the most flexible functional form possible. At the same time, while no single indicator can capture all aspects of decentralization, some indicators are more inclusive and informative than others. Therefore, if for some reason we have to use a single indicator, our study suggests which indicator would be more appropriate for the hypothesis at hand. We illustrate these points examining differences in the empirical behavior of different decentralization indicators in relationship to each other and in their statistical association with some relevant economic outcomes in the fiscal decentralization literature.
Working Paper Number 09-12
How Productive is Public Capital? A Meta-Regression Analysis
Pedro R.D. Bom and Jenny E. Ligthart, August 2009
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The last two decades have witnessed a great deal of effort devoted to measuring the private output elasticity of public capital, but remarkably little consensus has emerged. This paper estimates the meta-output elasticity of public capital and explains the heterogeneity of primary estimates around this value. We develop a simple approach to measure and correct meta-estimates for bidirectional publication bias. Using meta-regression analysis applied to a sample of 67 studies for the 1983{2008 period, we derive an unconditional meta-output estimate of 0.146 and show that the `true' effect is rather heterogeneous. The intraregional short-run output elasticity amounts to 0.085. In the long run, and after accounting for interregional spillover effects, the contribution of public capital to output increases by a factor of three. The results suggest that the high output elasticities found in the early time-series literature are compatible with long-run (cointegrating) estimates found more recently. We also show that the observed estimates are significantly inflated by bidirectional publication bias.
Working Paper Number 09-11
Direct versus Indirect Taxation: Trends, Theory and Economic Significance
Jorge Martinez-Vazquez, Violeta Vulovic, and Yongzheng Liu, August 2009
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One of the oldest questions in the theory and practice of taxation is that of the appropriate mix of direct and indirect taxes. The choice between direct and indirect taxes has contributed to a long animated debate, in political and academic circles, regarding the virtues and defects of those two forms of taxation. In this paper we provide an overview of the evolution of the ratio of direct taxes to indirect taxes across countries over the past three decades, the theorizing that has gone behind the alleged superiority of one form of taxation or the other, the determinants that appear to be behind the intensity with which both forms of taxation are used, and the economic relevance of the choice of tax structure in terms of economic growth, macroeconomic stability, the distribution of income, and the flow of foreign direct investment (FDI).
Working Paper Number 09-10
Public Policies and FDI Location: Differences Between Developing and Developed Countries
Timothy Goodspeed, Jorge Martinez-Vazquez, and Li Zhang, August 2009
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Host country government officials in developing and developed countries alike would like to know the impact of their public policies on foreign investment in their countries. Unfortunately, the literature does not provide a single view, and there are likely to be differences between developing and developed countries. This paper examines the impact of three host country government policies on the host’s FDI stock: taxation, good governance, and infrastructure. We focus on whether the impact of these factors on FDI differs depending on the level of development of the host country. The regression results indicate that FDI is sensitive to host country taxation in developed countries, but not in developing countries; FDI is sensitive to host country corruption in developing countries but not developed; and FDI shows sensitivity to host country infrastructure quality in both developed and developing host countries, though FDI appears to be more sensitive in developing host countries.
Working Paper Number 09-09
Local Government Taxation in Pakistan
Roy Bahl and Musharraf Cyan, August 2009
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The purpose of this paper is to evaluate the current practice of local government taxation in Pakistan and to point the way toward structural reforms that are both more rational and more in step with Pakistan’s vision for its fiscal decentralization. The analysis here is restricted to sub provincial governments, i.e., districts, TMA’s and union councils but with a decided emphasis on the former two. We do this by examining the current practice, and by drawing on international comparisons and “best practices” as laid out in the theory of fiscal federalism.
Working Paper Number 09-08
Pakistan Tax Policy Report: Tapping Tax Bases for Development
Jorge Martinez-Vazquez and Kaspar Richter, August 2009
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Pakistan’s economic development is once again threatened by macroeconomic imbalances. Broadly speaking, high growth in the 1960s was followed by low growth in the 1970s, and high growth in the 1980s by low growth in the 1990s, as macroeconomic vulnerabilities derailed development. Supported by a favorable global environment, Pakistan returned to a strong development record for much of this decade. Growth accelerated and fiscal and social indicators improved. But as in the past, the gains proved unsustainable, as economic policies adjusted too little and too late to a deterioration in the external environment. The looming crisis is threatening to undo much of the recent development
progress.
Working Paper Number 09-07
West Bengal: Fiscal Decentralization to Rural Governments: Analysis and Reform Options
Roy Bahl, Geeta Sethi, and Sally Wallace, July 2009
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This report is about the fiscal performance of rural local governments in the state of West Bengal. Specifically, our goal is to develop a comprehensive fiscal information system for all rural local governments, and to use these data to valuate the intergovernmental finance structure in the state. The work is of significant policy importance, given the need to implement programs to respond to the constitutional amendments mandating fiscal decentralization, and to support central and state government initiatives to use the Panchayat Raj Institutions (PRIs) as an important part of its poverty alleviation strategy. A more immediate need in West Bengal (and other states as well) is to support the work of the State Finance Commissions to better integrate rural local governments into the intergovernmental fiscal framework. To date, there has not been a comprehensive review of rural local government finance in West Bengal.
Working Paper Number 09-06
Does Labor Supply Respond to a Flat Tax? Evidence from the Russian Tax Reform
Denvil Duncan and Klara Sabirianova Peter, June 2009
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We exploit the exogenous change in marginal tax rates created by the Russian flat tax reform of 2001 to identify the effect of taxes on labor supply of males and females. We apply the weighted difference-in-difference regression approach and instrumental variables to the labor supply function estimated on individual panel data. The mean regression results indicate that the tax reform led to a statistically significant increase in male hours of work but had no effect on that of females. However, we find a positive response to tax changes at both tails of the female hour distribution. We also find that the reform increased the probability of finding a job among both males and females. Despite significant variation in individual responses, the aggregate labor supply elasticities are trivial and suggest that reform-induced changes in labor supply were an unlikely explanation for the amplified personal income tax revenues that followed the reform.
Working Paper Number 09-05
Inequality and Volatility Moderation in Russia: Evidence from Micro-Level Panel Data on Consumption and Income
Yuriy Gorodnichenko, Klara Sabirianova Peter, and Dmitriy Stolyarov, June 2009
Working Paper Number 09-04
South Africa’s Provincial Equitable Share: An Assessment of Issues and Proposals for Reform
James Alm and Jorge Martinez-Vazquez, March 2009
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The design of any system of transfers is a complex matter, and in practice very few countries are able to get it right, especially at the start of a process of decentralized system of finance. It is quite obvious that South Africa has made great strides in the design of its transfer system, primarily comprised of: an unconditional grant distributed by formula, the “Provincial Equitable Share” (PES); a system of conditional grants; and several other non-conditional transfers. In this report we focus exclusively on the analysis of the existing PES transfer and also on possible options for its reform. Our report consists of three main parts. We first summarize the main features of the PES. We then focus on what may be lacking with the current system. We finish with options for reform.
Working Paper Number 09-03
Fiscal Decentralization and Public Sector Employment: A Cross-Country Analysis
Jorge Martinez-Vazquez and Ming-Hung Yao, March 2009
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This paper investigates the relationship between public sector employment and fiscal decentralization. We develop a theoretical framework modeling the interactions between the central and sub-national executives regarding the level of public employment at the central and sub-national government levels. In our empirical work, based on a large cross-country dataset, we find that, ceteris paribus, the level of total public sector employees in a country increases with its level of fiscal decentralization. Even though central government employment decreases with decentralization, this is more than fully offset by the increase in employment at the sub-national level accompanying decentralization. Our empirical results also indicate that the relationship between GDP per capita and public sector employment is not monotonic but quadratic, that total public sector employment is higher in unitary countries vis-à-vis federal countries, and that public employment increases with the country’s international economic openness.
Working Paper Number 09-02
Financial Incentives in the Austrian PAYG-Pension System: Micro-Estimation
Roman Rabb, February 2009
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The scope of this paper is to investigate the impact of financial incentives on the retirement decision of private sector workers in Austria. How do financial incentives embedded in the Austrian pension system impact individual retirement behavior? We are using a unique data set of individual social insurance spells. Micro-estimating the impact of financial incentives on the probability of retirement shows that the behavioral response to financial incentives in Austria is relatively large in international comparison. Also, there are striking behavioral differences between men and women. Using the estimates to simulate the response to reform shows that actual retirement ages could be most successfully brought up by a 6 percentage point deduction in pension benefits per year of early retirement.
Working Paper Number 09-01
Food Consumption in Jamaica: A Household and Social Behavior
Shiyuan Chen and Sally Wallace, February 2009
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This paper explores household food consumption in Jamaica and estimates the effects of related variables on the intensity of consumption. Use of data from the 2001 Jamaica Survey of Living Conditions permits estimation of an Engel curve that reflects the relationship between household food consumption and related variables. As a means to investigate a possible neighborhood effect on food consumption, spatial correlations pertaining to neighborhood food consumption were tested and estimated. The estimated results can be used to help formulate policies that may produce more effective food support distribution programs.
