For local governments, a polycentric system is one where you have multiple, partially overlapping types of local governments. The communities which through government jointly produce the waste services may be different from those which provide the schools or fire protection. There is good reason for this a priori, as there may be differences in preferences for these services or the cost of provision may be different. What makes sense as boundaries for a school district might not align with what works for a network of sewer systems. On the other hand, you can imagine goal conflicts and coordination problems occurring that result in unnecessary expenses (e.g. my city just repainted a road only to see the sewer utility rip it up the next day for some maintenance). These trade-offs were discussed extensively in this famous 1961 paper on metropolitan areas by Vincent Ostrom, Charles Tiebout, and Robert Warren. Polycentric governance is more generally discussed as an important adaptive management system for resolving commons property problems featured in Elinor Ostrom’s Nobel prize winning research.

Via Rob Greer (Texas A&M), Tima Moldogaziev (University of Georgia), and Tyler Scott (UC-Davis) in the International Journal of the Commons comes “Polycentric Governance and the Impact of Special Districts on Fiscal Commons.” Let’s start with the abstract:

Local government services are increasingly being provided in fragmented polycentric systems where the overlapping jurisdictions draw resources from the same fiscal base. Developing optimal policies for the efficient management of fiscal resources requires a consideration of the total underlying fiscal pool. In this study, we evaluate the impact that special purpose districts have on debt ratios at the county “common pool” level in the State of Georgia (U.S.) between 2005-2014. Empirical findings suggest that inclusion of all general government and special purpose debt for each county may at times result in a greater burden on fiscal common pool than existing rules permit. These results call into question the efficacy of fiscal policies in a polycentric governance system that neglect to account for debt levels for all actors within the confines of a single fiscal common pool unit. Results also show that total debt ratios are significantly affected by special districts that operate within boundaries of a single county. We find no evidence that independent special districts have a differential impact on fiscal common pools compared to their dependent counterparts. 

So, the classic Tragedy of the Commons framework for setting up an empirical test is that you have some kind of production function from a resource input, like fish production from a lake. A monopolist will fish sustainability to maximize the long-run productive value of the lake, but add a competitor and you get diminished long-run production (albeit, perhaps increased short-run) because neither is promised that they have rights to the future stock. Now maybe the two can come together to coordinate and cooperate to avoid this, but the coordination problem becomes increasingly difficult as the number of competitors increase. You get continuously increasing costs from effort to extract diminishing product.

In taxation, the logic of the commons is somewhat similar. Increasing the number of stakeholders with access to the same economic base will cause each individual unit to exert additional “tax effort” that jointly produce lower tax revenues than a singular monopoly government (e.g. See Figure 2 in this 1997 Russ Sobel paper).

Greer and colleagues extend a similar argument, pointing out that many of these forces can affect the amount of public debt (see their Section 3):

• Debt represents the borrowing of future revenues, but the ability to make a unique claim to these future revenues are less credible as you increase the number of overlapping local governments.
• Multiple overlapping governments will face revenue shortfalls because of the previously mentioned taxing problems, and thus will turn to debt.
• Special district formation in an area is often done to take on new debt, sometimes to circumvent state restrictions.
• More decentralized systems increase the set of specialized public goods, which increases demand (and debt to back) public services.

For all these reasons, Greer and colleagues say, you could expect increases in debt measures with the number of special districts (special districts being the source of within-county variation in the number of overlapping local governments). On page 18, they provide a plot of their credibility intervals (Bayesian confidence intervals). The mean of the interval suggests that adding a special district increases the total debt to assessed value ratio by 0.20 percentage points, which is about 7 percent of the mean debt observed. If you assume linearity in this effect, the median Georgia county with 6 special districts could cut their overall debt by about one-third if they consolidated to a single special district. The research design cannot tell us much about whether this would be welfare increasing or not because it does not discriminate among the potential mechanisms. But the findings lend credence to the idea that these concerns are worth further investigation because special district formation does seem to be changing the fiscal landscape.

See Also:

Raudla, Ringa. (2010). “Governing the Budgetary Commons: What Can We Learn from Elinor Ostrom?” European Journal of Law & Economics.

 

Some recent research that has otherwise gone unmentioned here:

“Pension Taxes and Labor Supply: Evidence from a Historical Quasi-Experiment.” Olga Malkova. SSRN Working Paper.

“Information, Tax Salience, and Support for School Bond Referenda.” By Eric Brunner, Mark Robbins, and Bill Simonsen. Public Budgeting & Finance.

“House Prices and Property Tax Revenues During the Boom and Bust: Evidence from Small-Area Estimates.” By Chris Goodman. Growth & Change.

“The Fiscal Disparity and Achievement Gap Between Extremely Wealthy and Poor School Districts in Illinois.” By Mary D. Bruce, Natalia Ermasova, and Linda Mattox. Public Organization Review.

“Inter-municipal Cooperation and Local Taxation.” Marie-Laure Breuille, Pascale Duran-Vigneron, and Anne-Laure Samson. Journal of Urban Economics.

“Partial Fiscal Decentralization Reforms and Educational Outcomes: A Difference-in-Difference Analysis for Spain.” Paula Salinas and Albert Sole-Olle. Journal of Urban Economics.

“Inclusive Fiscal Reform: Ensuring Fairness and Transparency in the International Tax System.” By David Bradbury and Pierce O’Reilly. International Tax & Public Finance.

“Do Sanctions Improve Compliance with Public Finance Laws and Regulations?” Richard Allen and Yugo Koshima. Public Budgeting & Finance

“Tax Compliance and Enforcement.” By Joel Slemrod. NBER Working Paper.

“Behavioral Public Economics.” By B. Douglas Bernheim and Dmitry Taubinsky. NBER Working Paper.

“Redistributing the Gains from Trade Through Progressive Taxation.” By Spencer Lyon and Michael Waugh. NBER Working Paper.

“Unintended Consequences of Eliminating Tax Havens.” By Juan Carlos Suarez Serrato. NBER Working Paper.

That is the question in a new paper forthcoming in the Journal of Urban Economics by Andres Rodriguez-Pose (London School of Economics) and Michiel Gerritse (University of Groningen), and the full title is “Does Federal Contracting Spur Development? Federal Contracts, Income, Output, and Jobs in US Cities.” Here is the abstract:

Firms and governments alike frequently court federal government contracts to generate more jobs and trigger economic growth. However, the employment and output impact of government contracts remains controversial. We use georeferenced data on United States (US) federal contracts, distinguishing between the location of the recipient and the location of the activity, for the years 2005-2014 in order to assess the employment and output impacts of federal contracting in metropolitan areas of the US. We resort to a shift-share instrument and precise location-specific fixed effects to estimate the causal impact of spending. Cities that receive more contract expenditure witness an expansion in output – with contracts generating $1.4 per dollar spent – but experience only modest increases in employment. The impact is also constrained geographically and short-lived. The results suggest that, on average, the effects of federal contracting on local economies are modest, meaning that attracting federal contracts may not be an effective urban development strategy.

For those reading carefully at home, the abstract is describing a Bartik instrument, and yes, it considers advice from Goldsmith-Pinkham et al. (2018) and shows that it results in a weak instrument problem that they are able to improve upon through a principal component analysis. Check out Appendix B for more.

To think about this question more theoretically, the not-famous 1956 Charles Tiebout JPE paper is highly readable, and you can see it attempt to establish a theoretically sound bridge between city planners and economic researchers.

That is new in Public Choice’s online first bin, written by Francesco Forte in 1961, and I’m just going to have to share the abstract on this:

This is a revised version of Francesco Forte’s introductory lecture on welfare economics delivered in Charlottesville when he first arrived at the University of Virginia. It was then reproduced in the author’s mimeographed book “Introduction to welfare economics”, published by the Thomas Jefferson Center of the University of Virginia in 1961. In the “old welfare economics”, three fundamental approaches may be distinguished. Pareto’s “ophelimity” requires that someone is made better off and no one is made worse off. A similar problem is present both in Wicksell, by the rule of the unanimous consent of the electorate representative, and in the Italian School of Public Finance that requires an open competition aimed at assembling a majority that pursues a similar solution. Finally, Pigou’s paternalistic approach combines maximum national income with its optimal distribution. In the “new welfare economics”, the approach in terms of Pareto’s compensation principle does not generate a stable equilibrium; the social welfare function approach formalizes Pigou’s approach with the inclusion of paternalistic value judgements. The way out consists in combining Paretian ordinal choice with Wicksellian unanimity, with the Italian school’s suggestion of competition in collective choices, or with both.

 

There is a lot of public conversation about the appropriate use of shaming in civil society. Where the law fails to punish offenders, advocates say, shaming can be productive for punishment and future deterrence. Detractors worry that unregulated mob justice is not justice at all and that it has a quieting effect on genuine civil discourse where honest disagreement can occur. When shame is appropriate and how to generate good social norms is an ongoing question.

Shaming is also a public policy tool wielded by the government for purposes like encouraging energy conservation and extending the punishment of sex offenders. In tax policy, governments of every level around the world have experimented with the use of shaming to encourage enforcing tax payments. One difficulty with shaming is trying to distinguish it from other salience effects (i.e. reminding people they could be audited or are delinquent) that is unique from shaming. An excellent piece of research on the role of shaming in tax enforcement comes from Ricardo Perez-Truglia and Ugo Troiano (NBER, August 2018). Here is the abstract:

Many federal and local governments rely on shaming penalties to achieve policy goals, but little is known about how shaming works. Such penalties may be ineffective, or even backfire by crowding out intrinsic motivation. In this paper, we study shaming in the context of the collection of tax delinquencies. We sent letters to 34,334 tax delinquents who owed a total of half a billion dollars in three U.S. states. We randomized some of the information contained in the letter to vary the salience of financial penalties, shaming penalties, and peer comparisons. We then measured the effects of this information on subsequent payment rates, and found that increasing the visibility of delinquency status increases compliance by individuals who have debts below $2,500, but has no significant effect on individuals with larger debt amounts. Financial reminders have a positive effect on payment rates independent of the size of the debt, while information about the delinquency of neighbors has no effect on payment rates.

A bit more specifically, the researchers randomly sorted subjects into two treatment groups, group one represented zip codes from which one person would be selected, while in group two the researchers would also select additional areas from the same area to inform them about an online list of delinquents. Within these groups they randomize the salience of other information, in addition to notice that their “neighbors” were able to find them on the shaming list. The first treatment group ferreted out the salience or notice of being watched by the government, while the second added a peer component for the prospect of social pressure.

There is a lot of cross-randomization in this, so there is a rich array of findings, including some that allow them to arguably distinguish whether it was peer pressure via shaming or whether it allowed them to acclimate and contextualize their tax debt in a social context.  In the end, as the abstract says, the shaming seems to have worked for lower tax debts. Pages 5 and 6 walk neatly through the results with interpretation and qualifications.

That is a new paper in International Tax and Public Finance by Florian Buhlmann, Benjamin Elsner, and Andreas Peichl. An important concern about many social insurance programs is that their incentives create “welfare traps,” one of which is a high implicit marginal tax rate if expanding work results in losing welfare benefits (a nice collection of state estimates by Sebastian Leguizamon here).

The Buhlmann et al. investigate piece takes advantage of a couple of important sources of discontinuities and looks for evidence of bunching, i.e. an unusual clustering of observations around an important policy discontinuity. As bunching increases, so does presumably the social cost of offering the program. Here is the abstract:

Welfare programs are important in terms of reducing poverty, although they create incentives for recipients to maximize their income by either reducing their labor supply or manipulating their taxable income. In this paper, we quantify the extent of such behavioral responses for the earned income tax credit (EITC) in the USA. We exploit the fact that US states can set top-up rates, which means that at a given point in time, workers with the same income receive different tax refunds in different states. Using event studies as well as a border pair design, we document that raising the state EITC leads to more bunching of self-employed tax filers at the first kink point of the tax schedule. While we document a strong relationship up until 2007, we find no effect during the Great Recession. These findings point to important behavioral responses to the largest welfare program in the USA.

The authors aren’t able to distinguish whether these are “real” responses (e.g. people working less) versus “reporting” responses (i.e. people manipulating what they report as income to the government). This matters because the policy response should be different for the two response types, and social costs are lower if it is just a reporting response. But the study uses multiple strategies to provide credible evidence that we have cause to investigate further, because something is happening.

 

That is the title of a very interesting new paper appearing in Public Administration Review by Qiushi Wang (Sun Yat-sen University) and Jun Peng  (University of Arizona). The paper focuses on discount rate assumptions used in calculating future returns on pension assets. Increasing the discount rate implies that future liabilities are better funded by present assets, or conversely lowering the discount rate makes the pensions appear more unfunded. Actual future market returns are unknown, and funding the pension is in competition with other funding priorities in the current period, so subjective assumptions of the discount rate are at least as much a political consideration as it is a technocratic judgement.

Wang and Peng look at the public pension boards governing state plans and sets up two dimensions for measuring their “political embeddedness” in the Polanyi tradition. The first dimension they look at is the degree to which state government can directly control the outcome of pension decisions through strong ties to the the board (e.g. the use of political appointees). The second dimension is the degree to which pension decisions are influenced by outside interest groups (e.g. public unions) when ties to government are weak. They motivate a series of variables in this framework and estimate a Cox regression to see which factors jump out as being correlated with discount rate revisions between 2002 and 2014.

There is not an enormous amount of variation in the discount rate over time, so generally effect sizes are rather small. Still, the most consistent result they find among the variables motivated by political theory is the percent of political appointees on the board, who seem to be correlated with downward revisions in the discount rate, forcing the plans to appear less funded than before. The presence of a public sector union or having a more conservative state government, by contrast, did not have any effects. Generally speaking, the governments were less likely to make these revisions while experiencing fiscal stress regardless of who was governing them.

Given that public pensions are generally underfunded, these downward revisions are probably likely to be regarded as a more prudent financial change. It is hard to gerrymander an entire state, so it is not particularly clear why political appointees would be more long-term in their orientation. The authors speculate that politically appointed trustees were more concerned about long term health of the pension funds than trustees elected by plan participants. Generally I think people, maybe academics in particular, tend to underrate partisan appointments if there is an explicitly bipartisan effort. So perhaps states with lots of political appointments are making room on the board for bipartisan appointments where they can check each other’s work and enfranchise political allies to garner the trust necessary in defending technocratic assumptions. This is all to say that Wang and Peng have produced some intriguing data and results that are worth reading and pondering.

For some related literature, I would recommend Friedrich Breyer’s piece in the European Journal of Political Economy which attempts to broadly answer the question of why governments attempt to transfer from young to old, and why these transfers are not 100%.

The newest issue of Public Finance Review is now available, containing five research articles and two replication studies. Here is the table of contents:

How Did the Great Recession Affect Charitable Giving? By Arthur C. Brooks

Hesitating at the Altar: An Update on Taxes and the Timing of Marriage. By Nick Frazier and Margaret McKeehan.

Tax Compliance Costs: Cost Burden and Cost Reliability. By Sebastian Eichfelder and Frank Hechtner.

The Fiscal Effects of Work-Related Tax Expenditures in Europe. By Salvador Barrios, Serena Fatica, Diego Martinez-Lopez, and Gilles Mourre.

The Impact of Ideology on Investment Decisions of a Coalition: A Game Theoretic Analysis. By Ritika Jain and Shubhro Sarkar.

The Fiscal Impacts of Alternative Land Uses: An Empirical Investigation of Cost of Community Services Studies. By Christopher M. Clapp, James Freeland, Keith Ihlanfeldt, and Kevin Willardsen.

Replication of Goolsbee, Lovenheim, and Slemrod’s “Playing with Fire: Cigarettes, Taxes, and Competition from the Internet” (American Economic Journal: Economic Policy, 2010). By Emily Satterthwaite.

A Replication of “Do Voters Affect or Elect Policies? Evidence from the U.S. House” (Quarterly Journal of Economics, 2004). By Patrick Button.

Not about Trump or American elections, but with respect to public finance.

From the perspective of public finance scholarship, much of what I know about Russia comes from numerous studies over the years of their 2001 flat tax reform. The reform replaced a progressively structured system of 12, 20, and 30% with a single rate of 13%. Subsequently, Russia saw a real increase in PIT revenues both in terms of levels (about 20%) and relative to GDP (about 26%). The size of the reform and the greater revenues immediately thereafter were sure to bring it a great deal of attention from both academics and policy makers alike.

Of course, there was much at ideological stake to see a large country cut taxes and see increased revenues. Gaddy and Gales (Brookings) produced a report “demythologizing” the reform for its apparent “supply side” effects, and indeed those magnitudes are implausibly large to be attributable to the tax reform overall. Overall, however, a large country with a history of poor data is unlikely to be a source of high quality evidence on the big questions policy makers want to know. Instead, attention quickly turned to issues in compliance and tax evasion. In a 2005 IMF working paper, Ivanova, Keen, and Klemm took a broad investigation using both micro and macro data. Their conclusion was that there was no strong supply side effect of the reform, but that compliance did improve rather substantially. As you’ll see in a sampling of subsequent research on the reform (see below), I would say the Ivanova et al. findings have largely stood the test of time. To scholars of 2018 familiar with taxable income elasticities, that probably seems like a safe bet conclusion, but at the time most labor supply elasticities were still relatively large (around unity) and we were just on the edge of the improved data and technique literature that would ultimately bring those estimates way down.

• Gorodnichenko, Martinez-Vazquez, and Peter (2009). “Myth and Reality of Flat Tax Reform. Micro Estimates of Tax Evasion Response and Welfare Effects in Russia.” Journal of Political Economy. These authors compare surveys of household expenditure data and reported earnings to develop a measure of tax evasion. This allows them to derive a lower than conventional estimate of deadweight loss that considers tax evasion (i.e. households aren’t sacrificing as much consumption because they can hide their income from taxable authorities).
• Duncan and Peter (2010). “Does Labour Supply Respond to A Flat Tax? Evidence from the Russian Tax Reform.” Economics of Transition. Using micro data, they find real labor supply intensive margin work increases (i.e. hours of work) among men and at the distributional tails for women, as well as increased extensive margin responses (i.e. probability of reporting a job) for both genders. The authors note that these increases are not large enough to produce the aggregate increases in PIT revenues that followed the reform.
• Duncan (2014). “Behavioral Responses and the Distributional Effects of the Russian ‘Flat’ Tax.” Journal of Policy Modeling. The key insight of the model, fit to Russian data for the 2001 tax reform, is that income inequality from income tax data overstates actual income inequality because of tax reform. That is, the inequity of the Russian switch to the flat tax was overstated because high income taxpayers were evading higher rates under the progressive system, and therefore pay more in taxes on the flatter.

 

Suppose that you are an elected executive serving a multiyear term with unilateral control over the annual budget. At the end of your term you have the opportunity for reelection, what would your incentives be for allocating resources across the budget be? The classic view embedded in political economy is that you optimize the budget for electoral advantage, but what does that mean? It might mean that you time the patterns of tax and expenditures in order to coincide with the timing of your next reelection campaign. Perhaps voters have short memories or just dial up their salience of your activities during the campaign season. This might generate what the public choice literature calls “political budget cycles.”

A new paper forthcoming in Public Choice is “Overlapping Political Budget Cycles” by Dirk Foremny (University of Barcelona), Ronny Freier (Technical University of Applied Sciences Wildau), Marc-Daniel Moessinger (ZEW Mannheim), Mustafa Yeter (German Council of Economic Experts) advances this topic with an empirical investigation of political budget cycles in German municipalities between 1992 and 2006 where there exists randomly occurring electoral overlaps between the legislative and executive branches. Here is the abstract:

We advance the literature on political budget cycles by testing for cycles in expenditures for elections to the legislative and the executive branches. Using municipal data, we identify cycles independently for the two branches, evaluate the effects of overlaps, and account for general year effects. We find sizable effects on expenditures before legislative elections and even larger effects before joint elections to the legislature and the office of mayor. In the case of coincident elections, we show that it is important whether the incumbent chief executive seeks reelection. To account for the potential endogeneity of that decision, we apply an IV approach using age and pension eligibility rules.

For those interested in political budget cycles, in two of the last three years the Public Choice Society has given the Elinor & Vincent Ostrom Prize (i.e. best graduate student paper) to a study of the question. One is a metaregression analysis by Pierre Mandon and Antoine Cazals forthcoming in Journal of Economic Survey, the other is a working paper on US gubernatorial elections and government employment by Dodge Cahan. Lastly, the theory of political budget cycles have been successful in motivating instrument variables, with Steve Levitt’s 1997 AER paper on policing being a famous example.