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A joint initiative of Ludwig-Maximilians University’s Center for Economic Studies and the Ifo Institute for Economic Research
Bulletin
Volume 21 No. 2
April 2011
Richard Musgrave Lecture
Timothy J. Besley, this year’s winner of the Richard Musgrave Visiting Professorship, gave
a thoughtful, insightful lecture on the principles or public organisation, a field that, while crucial to state-building, has been hitherto neglected by theoretical public economics. (page 2)
Migration and Skills Shortages
Ifo News
(p. 4-5)
Munich Economic
Summit
(p. 2)
CESifo Venice Summer
Institute
(p. 6)
The population of many rich countries is ageing fast, with the implication that the number of actively working people supporting retirees will be increasingly small. Young
immigrants could fill the gap but, as Assaf Razin points out, designing suitable policies
to attract the right kind of immigrant is not easy.
(page 8)
Cascading Despots
What started out as a local uprising in Tunisia became twittered, youtubed and AlJazeeraed into a flood that swept across the Arab world. This, as Christopher Ellis
explains, is a fine example of an “information cascade”.
(page 3)
Costs and Benefits of Seceding
South Sudan has just decided to secede from its northern portion. Italy’s north would like to
dump its southern half. The motivations in both cases are quite different, as Philippe De
Donder’s research shows.
(page 7)
Munich Seminars
(p. 6)
Featured Researchers
Timothy J. Besley (p. 2)
Munich Economic Summit
Germany’s foremost economic forum is approaching a milestone: it will turn turn ten this
year. It will celebrate by casting a critical glance at a major issue these days: defining the
role of the state in an era of globalisation.
(page 2)
E. Kwan Choi (p. 8)
Philippe De Donder (p. 7)
Rajeev Dehejia (p. 7)
Christopher Ellis (p. 3)
Dan Friedman (p. 3)
Luca Micheletto (p. 7)
Assaf Razin (p. 8)
Christopher Timmins (p. 6)
Dieter Urban (p. 3)
Understanding Social Preferences
There is more to human choices than just self-interest. Our understanding of proper
behaviour arises from moral codes and group norms, as Dan Friedman explains in his CES
lecture series.
(page 3)
In-Kind Transfers
If a publicly provided good is treated as a factor of production, the government can provide
it for free without having to worry about over-consumption. This has taxation implications
as well. Luca Micheletto is devoting part of his research to this issue.
(page 7)
The Other GM
No, we are not talking about General Motors, but about that bogeyman stoking German
angst, together with nuclear power: genetically modified plants. E. Kwan Choi is doing
research on this.
(page 8)
Visit www.cesifo.org for the latest from CESifo
Vol. 21, No. 2 | April 2011
Richard Musgrave Visiting Professorship
10th Munich Economic Summit
Some Principles of Public Organisation
Public organisation is
an emerging field in
economics. Half-way
between
industrial
organisation and public policy, it is defined
as the organisation of
the provision of goods
and services where
social and private
returns diverge. As
such, it is a cornerstone of state-building.
such mission be written
down and enforced, and
who should choose it.
Mr Besley is the Director of the Suntory and
Toyota International
Centres for Economics
and Related Disciplines
(STICERD) and Kuwait
Professor of Economics
and Professor of Political Science at the London School of Economics and Political Science (LSE).
Timothy J. Besley
This was the topic chosen by Timothy J.
Besley, this year’s winner of the
Richard Musgrave Visiting ProfessorA former external member of the Bank
ship awarded jointly by the CESifo
of England Monetary Policy Committee,
Group and the International Institute of
Mr Besley is also a CESifo Research
Public Finance (IIPF), for his Richard
Fellow, a Research Fellow at the InstiMusgrave Lecture on April 8 at the
tute for Fiscal Studies, a member of the
University of Munich.
Canadian Institute for Advanced
Research (CIFAR), and a foreign honAlthough “the theory of public organisaorary member of the American Economtions is as fundamental a topic as the theic Association. He is a past co-editor of
ory of the firm,” as CESifo President and
the American Economic Review, and a
former IIPF President Hans-Werner Sinn
2005 winner of the Yrjö Jahnsson Award
put it, the field has still been relatively
of the European Economics Association.
neglected by theoretical public economHis research has a strong policy focus.
ics. Therefore, Mr Besley’s work on the
subject is particularly welcome.
The Richard Musgrave Visiting Professorship was established in 2009 by
Mr Besley started out by pointing out
the CESifo Group and the International
some of the principles of public organiInstitute for Public Finance (IIPF) to honsation, touching upon such aspects as
our the memory of the German-Ameriallocation, cost efficiency and quality of
can economist Richard Musgrave
the goods and services provided.
(1910–2007).
In this context, some key elements to
consider for setting up incentive-compatible organisational forms that deliver
the desired result are the nature of public
services, the role of incentives to provide such services, and the effect of
competition and organisation design,
including ownership of residual claims
and control rights.
The outputs, say health-care or education, have social returns that are hard to
quantify; the desired results are therefore better defined as a stated mission
than through any quantifiable figure. A
crucial part is understanding how the
mission is determined, and how far can
2
Born in Königstein, Mr Musgrave
worked as advisor to several US administrations and taught at various universities including Princeton, Johns Hopkins
and from 1965 to 1981 Harvard. He is
considered the father of modern public
finance in the Anglo-Saxon world. He
received an honorary doctorate from the
University of Munich, where he had
begun his studies. He helped establish
the Munich Center for Economic Studies
(CES) as well as CESifo, and was also
influential in the founding of the International Institute of Public Finance. Previous Musgrave visiting professors were
Alan Auerbach (2009) and Michael
Keen (2010).
Bulletin
The Munich
Economic
Summit
is
turning
ten
years
old.
Throughout its
first decade,
the Summit has unerringly put its finger
on the issues that would top the European
policy agenda in the following years.
It started out by casting a critical glance
at the challenges posed by enlargement.
Next, it performed a comprehensive
analysis of Europe’s laggard position
compared to the USA, followed by a critical look at the effects of the new EU
Constitution on integration and, a year
later, at Europe’s (lack of) progress
towards its Lisbon Goals.
It then analysed the challenges that the
new division of labour, demographics
and the competition for talent pose to
Europe’s future, to later dissect Europe's
climate policy blunders and, one day
after Greece collapsed, examine the way
forward out of the financial crisis.
The 10-year anniversary Summit, to be
held on May 19 and 20, will deal with
the evolving role of the state in a globalised economy. Its first panel will
examine how competitive is the social
market economy by comparing stateheavy economies with free-market ones,
and in particular Germany’s social-market, export-oriented model. Which system would make Europe more competitive, and more resilient?
The second panel will delve into the
state’s role in society: government vs.
citizen responsibility. Should citizens be
coaxed into taking more responsibility
for providing for their own future? How
can the state’s role as intergenerational
bridge be improved?
The final panel deals with the state’s role
in the economy: Centralisation or subsidiarity? Do we need an active national
or European industrial policy? Or a EUwide economic government?
Further details on the event on
www.munich-economic-summit.com.
Vol. 21, No. 2 | April 2011
Understanding Social Preferences
Cascading Despots
Friedman
Ellis
Human choices are
driven not just by
direct material selfinterest, but also by
moral sentiments such
as guilt and shame,
love and respect, and
by the urge to help
friends and to punish
miscreants. Such sentiments give traction
to group norms, or
moral codes — our
shared understanding
of proper behaviour.
Revealed social preferences arise from the
interaction of moral
sentiments and group norms.
It is crucial to understand social preferences because they undergird the institutions that have always shaped our world,
from ancient tribal gatherings through
classic city-states down to our modern
market, political and legal systems.
In his CES lecture series in April, Dan
Friedman will trace the co-evolution of
moral sentiments, group norms and
social institutions. Drawing on recent
insights from biology, evolutionary psychology, moral philosophy, neuroscience and anthropology as well as
experimental economics and institutional economics, he will discuss how biological evolution shaped our capacities
for moral sentiments, cultural evolution
gives content to other-regarding preferences, and institutions and norms coevolve; and will note many implications
for the modern world.
A CESifo Research
Network Fellow since
1999, Mr Friedman is
Distinguished Professor of Economics at
the University of California, Santa Cruz
(UCSC). He earned his
PhD in Mathematics
from UCSC under the
supervision of Fields
medalist
Stephen
Smale in 1977 and
after that worked as a
financial consultant at
Bank of America and
as an Assistant Professor at University of California, Los
Angeles, before joining the Economics
Department at his alma mater in 1985.
He has been a visiting researcher at
numerous institutions, including Berkeley, Stanford, Harvard and MIT, and, in
1997, CES.
The author (or co-author) of some 100
research articles, four books and a dozen
National Science Foundation grants, Mr
Friedman serves on the editorial board of
Games and Economic Behavior, Experimental Economics, and Journal of Evolutionary Economics; he recently stepped
down from the board at American Economic Review.
During his current visit, he will be working on a new graduate-level textbook
called Evolutionary Games in Nature,
Computers and Society, co-authored with
UCSC biologist Barry Sinervo.
Dieter Urban Passes Away
Prof. Dieter Urban passed away last
March 7th. He was 42 years old. A professor of economics at the RWTH Aachen
University, Mr Urban had joined the
CESifo Research Network in 2006, where
he was an active participant in the Global
Economy Area and authored a number of
CESifo Working Papers. He had obtained
his PhD from the Copenhagen Business
School in 1999 and held research posi-
tions or fellowships at
Pennsylvania State University, Centro Studi Luca
d’Agliano (Milan), LSE,
and University of Mainz.
He will be missed for his
warm personality, his
courteous nature and his
outstanding professional qualities.
Bulletin
How
Muammar
Qaddafi,
Hosni
Mubarak and other
current and former
Arab
autocrats
must rail against
Tunisia’s former
ruler.
Had
he
snuffed out the
revolt in his country, their grip on
power would still
be secure. What had started out as a local
uprising became twittered, youtubed and
al-jazeeraed into a flood that washed
right across the Arab world, and is now
jangling nerves in Iran and China as well.
This, as Christopher Ellis points out, is
a fine example of what he calls an “information cascade,” where one individual
observes another’s actions and from them
deduces some information that then causes him to act similarly, leading ultimately
to mass protests and even regime
changes.
Mr Ellis analysed these issues in an article, “Information Cascades and Revolutionary Regime Transitions,” written
with John Fender and forthcoming in
Economic Journal. Their paper warns,
however, that cascades and their concomitant political consequences can be
mistakes, if one agent infers information
from, and then copies, the act of another
who has in fact acted in error, thus compounding the error.
While at the Ifo Institute, Mr Ellis and his
coauthor, Silke Friedrich, will be studying the role of strategic public goods provision in the determination of political
boundaries and regimes. Specifically,
they will investigate why countries unify
and split up, and what form of governance structures are associated with these
changes.
Christopher Ellis is a Professor of Economics at the University of Oregon, and
has previously held positions at the University of Lancaster and the University of
Kent, and has held visiting appointments
at Cornell, Monash, Melbourne, Tulane
and Aomori Public College.
3
Vol. 21, No. 2 | April 2011
News
Joint Economic Forecast Spring 2011
The world economy is buoyant in spring
2011. Especially in the emerging
economies the economic momentum,
after a phase of noticeably slower expansion in the summer half-year of 2010, is
strong once again. But output and trade
have picked up noticeably also in the
advanced economies. However, the pace
of the expansion in the US economy is
still moderate in comparison with previous upswings, and in the euro area the
ty in that it represents a risk for the supply of the world economy with mineral
oil. The recent rise in the oil price, however, is largely a reaction to the healthy
state of the world economy. Only about
10 dollars per barrel is Joint Economic
attributable to increased supply risks. The
effect of this on world economic expansion will only be weak.
Also prices for industrial raw materials
and foodstuffs have increased strongly
since summer 2010. A major cause of the
strong price dynamics for raw materials
Real GDP in the Euro Area
Seasonally and calendar adjusted data
is the still very low
Index
%
104
3
interest rates worldcurrent rate of change
wide. In the US, the
annual average
102
2
Q1 2008=100
euro area, the UK
1.6%
and Japan, key lend0.3%
1.7%
1
100
ing rates have not
98
0
yet been raised,
1.7%
even though the
Forecast period
96
-1
-4.0%
European Central
Bank has hinted at
94
-2
such a hike. In con92
-3
trast to monetary
2008
2009
2010
2011
2012
Change on previous quarter in % (right- hand scale).
policy, fiscal policy
Sources: EUROSTAT; calculations and forecast by the German Institutes (April 2011). GD Spring 2011
is no longer expansive, since many fiscal-policy measures that had been taken
picture is anything but uniform: with an
to combat the financial and economic criupswing in Germany and some of its
sis have expired.
neighbouring countries and stagnation in
the Mediterranean area.
The world economic upswing will last
throughout this year and in the coming
At the present, world attention is still
year, but will weaken moderately. Espefixed on the natural and nuclear disasters
cially in the emerging economies, ecoin Japan. Normally, the macroeconomic
nomic policy-makers will further increase
effects of natural catastrophes are not
the degree of restriction in order to modvery serious in industrialised countries. In
erate the increase in prices. In the
this case, however, the institutes anticiadvanced economies, the recovery will
pate perceptibly higher production losses
continue since monetary policy will
than after the Kobe earthquake in 1995. It
remain expansive and the dampening
will take some months before sufficient
after-effects of the financial and economelectricity capacities are restored and proic crisis will slowly weaken. In total,
duction bottlenecks are eliminated. Howworld economic output should expand
ever, effects on the economic activity in
this year by nearly 3.5%. World trade is
other parts of the world will be perceptilikely to grow at a quite strong pace of
ble only in the short term.
9% this year and by 7% next year.
The political unrest in Arab world is also
Germany too is experiencing a strong
having a disturbing effect. The unrest is
upswing in spring 2011. The weaker
of importance for world economic activia)
increase in aggregate output in the fourth
quarter of 2010 was mainly due to the
early onset of winter weather and is no
indication of the growth forces having
weakened. The upswing is being borne
both by foreign as well as domestic
demand. In manufacturing, incoming
orders have increased strongly from all
areas of the world. Enterprise assessments of the economic situation are as
favourable as they were in the early years
of reunification. The construction industry continues to profit from low interest
rates. For the first quarter of this year, the
current indicators point to a rise in GDP
of 0.8%. There is much evidence that the
expansion will remain strong in the coming months.
Important survey indicators are at their
highest levels, international economic
activity continues to be expansive and
interest rates should remain low. In addition, employment and wages are increasing, which means further improvement in
the earnings situation of private households.
a)
C
4
Bulletin
For the forecast period a gradual shift in
the growth forces is expected. Domestic
demand will be dampened as a result of a
slightly restrictive fiscal policy orientation and this year by the drain on purchasing power due to the strong increase
in raw material prices. In contrast, however, the common European monetary
policy will continue to have a very expansive effect in Germany. This will stimulate investment activity. In home building
the upward trend should continue. Investments in plant and equipment will be
stimulated by the increasing capacity utilisation and the favourable financing conditions. Consumer spending will expand
robustly due to increasing employment
and higher wage income.
Overall, domestic demand will grow at a
nearly unchanged pace. In contrast, external trade will make a smaller contribution
to the expansion than in 2010. As a result
of the rapidly growing domestic demand,
imports will expand more strongly than in
Vol. 21, No. 2 | April 2011
the second half of 2010. At the same time,
the growth in exports will slow temporarily. A contributing factor here is that German enterprises are likely to lose some of
their price competitiveness due to a
stronger increase in domestic unit wage
costs. Not until the end of the forecast
period will exports presumably expand
again somewhat when the economies in
the euro area and in the US grow at a
slightly stronger pace.
All in all, the institutes expect that GDP
will increase by 2.8% this year and by
2.0% next year. The 68% forecast confidence interval for 2011 lies between 2.0%
and 3.6%. In light of the strong economic
upturn, the situation on the labour market
will continue to improve. However, the
increase in employment is likely to slow
during the forecast period, since the
expansion of production will abate somewhat and wage developments will lead to
less stimulation of employment. The
institutes expect an increase in the number of gainfully employed of 430,000 this
year and 275,000 next year. For 2011 and
2012, an unemployment rate of 6.9% and
6.5%, respectively, is anticipated.
Because of the strong economy, the
upsurge of prices and costs has accelerated. Inflation has been increasing already
since mid-2010. In the first quarter of
2011, consumer prices were 2.1% higher
than a year before. This is primarily a
reflection of increasing prices for raw
materials, especially for crude oil. But in
the meantime, core inflation has also
risen – price stability in Germany is being
increasingly endangered by the low interest rates of the ECB.
With increasing employment and declining unemployment, shortages are arising
in more and more segments of the labour
market, for which reason the rise in actual earnings might accelerate. Although
cost pressure from the raw materials markets will abate during the forecast period
– under the assumption of unchanged raw
materials prices – the internal upsurge in
prices will amplify. In total the institutes
expect an inflation rate of 2.4% for this
year and 2.0% for the next.
The continuing strong economic activity
and the budget consolidation measures
will lead to a clearly improved situation
for public finances. For 2011 a government budget deficit of 45 billion euros is
expected, which should fall to 23½ billion euros in 2012. In relation to nominal
GDP, the deficit will be 1.7% in 2011 and
0.9% in 2012. Since the output gap will
be slightly positive in 2012, this implies a
structural deficit of about 1%, after 1½%
in 2011. Risks come particularly from the
international environment. A further
noticeable rise in the price of raw materials, in particular if this is due to a supply
shortage as a result of an escalation of the
situation in the Arab world, could clearly
dampen the expansion both nationally
and internationally. Also the situation of
the public finances of many countries in
the euro area is still strained. An escalation of the debt and confidence crisis
could place considerable burdens on the
German economy.
However, there is also the possibility that
the expansion will turn out to be stronger
than we forecast here. In many countries,
interest rates are at historically low levels. In light of this, both world economic
activity and economic activity in Germany could expand more strongly than
our forecast expects. Noticeably stronger
economic activity would lead, sooner or
later, to a greater surge in prices, which
could touch off a wage-price spiral.
The arrangements adopted for ESM give
rise to doubts on this point, however.
Instead, the current arrangements give
reason to expect that the creditors will not
share in the costs even when a country is
faced with serious financing problems;
this should be the case, however, so that
the markets evaluate the risks appropriately. A participation of the capital
providers is only credible if a government
default does not lead to larger disturbances on the financial markets or in the
banking system. In order to achieve this,
a preordained insolvency procedure for
states is necessary. The route chosen for
the ESM does not assure this and it can
ultimately lead to a considerable weakening of the solidarity of the financially
sounder countries. The institutes therefore recommend that the federal government strive to achieve changes in the ESM
with the goal of creating an operative and
incentive-compatible insolvency mechanism for states.
After the abandonment of the no-bail-out
principle anchored in the Maastricht
Treaty, the European Union has been
seeking a new institutional framework for
fiscal policy. On 24-25 March 2011, the
European Council decided on measures
aimed at increasing fiscal discipline,
avoiding so-called macroeconomic
imbalances and expanding economic-policy coordination. In addition, the current
rescue package for the troubled euro
countries will be replaced in 2013 by the
European Stability Mechanism (ESM).
In Germany the public-finance situation
has clearly relaxed; already in 2011 the
3% deficit mark will not be exceeded. In
addition to the strong economy, the consolidation measures will also contribute
to this. The maximum net borrowing of
the federal government set on the basis of
the 2010 budget planning appears high
from the present perspective and could be
significantly undercut. This could arouse
demands for spending increases or tax
reductions. It is important, nevertheless,
that the consolidation course be retained
in the coming years. Extensive tax cuts
are presently not advisable insofar as they
are not offset by corresponding spending
cuts. The gain in efficiency would be offset by a weaker robustness if the tax cuts
mean that the public debt ratio is not further reduced.
The clear commitment to rigorous fiscal
consolidation is a good thing. Also the
approach of the Euro-Plus Pact of systematically discussing economic developments in the member states of the currency union and identifying problems is sensible in that it will increase transparency
and possibly create pressure for political
action. It is particularly to be welcomed
that the responsibility for sound economic policy will ultimately remain with the
national governments. This should also
imply, however, that the countries bear
the financial consequences of their economic-policy actions.
Thus, in the coming years restrictive
impulses will emanate from fiscal policy.
These impulses will have to be much
stronger in other euro countries than in
Germany. This also has implications for
monetary policy. An underutilisation still
prevails in the euro area. Also monetary
indicators and inflation expectations give
no reason for assuming direct dangers for
price stability. With an increasing closing
of the output gap, interest rate adjustments may indeed become necessary.
However, the ECB is well-advised to
exercise some caution in light of the
heightened insecurity that still prevails.
Bulletin
5
Vol. 21, No. 2 | April 2011
Munich Seminars
Going Hedonic
Timmins
Since the publication of
Rosen’s “Hedonic Prices
and Implicit Markets” in
1974, property value hedonics has become the workhorse model for valuing
local public goods and
amenities, despite a number
of well-known and welldocumented econometric
problems.
For example, endogeneity concerns in the
second stage of Rosen’s procedure have
proven difficult to overcome using standard econometric arguments. This problem has led researchers away from estimating marginal willingness-to-pay functions altogether, relying instead on the
first-stage hedonic price function, which is
only useful for the valuation of marginal
policy changes.
Christopher Timmins has proposed a
new econometric procedure to recover the
marginal willingness-to-pay function that
avoids these endogeneity problems while
remaining computationally light and easy
to implement. Applying this estimator to
data on violent crime rates in the Los
Angeles and San Francisco metropolitan
areas, he finds that naïve estimators may
Deutschlands große Tageszeitung
overstate the benefits of
crime reduction by more
than a factor of two.
His recent research has
focused on measuring the
costs associated with exposure to poor air quality, the
benefits associated with
remediating brownfields
and toxic waste under the
Superfund program, and the valuation of
non-marginal changes in disamenities,
such as was the case with the large reductions in violent crime that occurred in
many US cities during the 1990s.
Christopher Timmins is an Associate Professor in the Department of Economics at
Duke University, with a secondary
appointment in Duke’s Nicholas School of
the Environment. He holds a BSFS degree
from Georgetown University and a PhD in
Economics from Stanford University.
He currently serves on the editorial board
of the American Economic Review and is a
co-editor of the Journal of Environmental
Economics and Management. He is also a
research associate in the Environmental
and Energy Economics group at the
National Bureau of Economic Research.
Chaired by Hans-Werner Sinn (CESifo) and
Marc Beise (Süddeutsche Zeitung)
CESifo Conference Centre
2 May 2011
Paul de Grauwe
University of Leuven
The Sovereign Debt Crisis and the
Future of the Euro
30 May 2011
Jean Pisani-Ferry
Director of Bruegel
Reforming the International Monetary
System: a Good Idea?
6 June 2011*
Hans Geeroms
Adviser for European and
International Economic Affairs to the
Prime Minister of Belgium
20 June 2011*
Jürgen Stark
Board Member, European Central Bank
Staatsschuld und Geldpolitik: Lehren aus
der globalen Finanzkrise
11 July 2011*
Bernd Huber
President of the University of Munich
* Topic to be announced. For details, please check
www.cesifo-group.de/link/0010-MUNICHSEMINARS
CESifo Venice Summer Institute
The twelfth CESifo Venice Summer Institute will be held from 18 to 23 July 2011 at
its traditional venue, the San Servolo
island in the Bay of Venice. It will feature
six workshops, running in parallel pairs.
The first two, to be held on 18-19 July, will
be China and the Global Economy Post
Crisis, organised by John Whalley and
Peter Egger, with Mary E. Lovely (Syracuse University) and Shang-Jin Wei
(Columbia University) as keynote speakers, and Globalisation, Trade, FDI and
the Multinational Firm, organised by
Sjoerd Beugelsdijk, Steven Brakman,
Hans van Ees and Harry Garretsen, and
with Alan Rugman (University of Reading), Gianmarco Ottaviano (Bocconi
University) and Bruce Blonigen (University of Oregon) as keynote speakers.
6
One of the two workshops in the next batch,
Malnutrition in South Asia, organised by
Rohini Pande and Seema Jayachandran,
will be by invitation only. Its companion
workshop will be The Economics of Conflict - Theory and Policy Lessons, organised by Karl Wärneryd; the keynote lectures
will be delivered by Stergios Skaperdas
(University of California, Irvine) and Kai
Konrad (Max Planck Institute for Tax Law
and Public Finance). These workshops will
be held on 20 - 21 July.
The closing pair of workshops, scheduled
for 22 – 23 July, will be Global Interdependence, Decoupling, and Recoupling,
organised by Yin-Wong Cheung and Frank
Westermann, with keynotes from Michael
P. Dooley (University of California, Santa
Cruz), Linda Goldberg (Federal Reserve
Bulletin
Bank of New York)
and Nelson C. Mark
(University of Notre
Dame), and Lessons
from the Economics
of Crime: What
Works in Reducing
Offending?, organised
by
Philip
Cook,
Stephen
Machin,
Olivier Marie and Giovanni Mastrobuoni. Its
keynote speakers will
be Jens Ludwig (University of Chicago),
Stephen Machin (University College
London) and John Donohue (Stanford
Law School).
Further info at www.cesifo.org/venice.
Vol. 21, No. 2 | April 2011
Secession’s Costs and Benefits
Kind of In-Kind
De Donder
Micheletto
It is well known that northern
Italy would like to dump the
country’s southern portion.
The motivation is mainly
economic: the thriving north
must subsidise the perennially stagnating south, unlike,
say, South Sudan’s secession
from the north, where a religious/ethnic
motivation
dwarfed the economic one.
Philippe De Donder, while at CES, is
casting some light on this by examining
the political economy of secession, as part
of a project he is conducting with Vincent
Anesi (University of Nottingham).
Several papers in the political economy literature have studied the decision by a
region to secede as the result of a cost-benefit analysis. The main benefit from secession, they argue, is to allow the seceding
region to choose a public policy better tailored to the preferences of its inhabitants,
while the main cost is the loss of the
returns-to-scale associated to belonging to
a larger entity. This simple approach
allows to obtain testable implications,
since any variable that, say, increases the
benefit of secession (such as the cultural
diversity across regions) should result in a
higher probability that the region secedes.
Unfortunately, several such implications
are not borne out by the data. Messrs De
FROM CHILD LABOUR
TO THE
Donder and Anesi want to
improve upon these models
by allowing the non-seceding
majority of the country to
anticipate the secession decision by the minority, and to
react by either accommodating this minority (for instance
by proposing a national policy closer to the minority’s
wishes) to prevent secession,
or by fighting the secession attempt in
order to keep the country united by force.
An in-kind transfer is
the public provision of a
non-cash private good.
Luca Micheletto is
devoting part of his stay
at CES to working on a
paper reassessing the
role of in-kind transfers
as a redistributive
device in a model of
optimal income taxation
where agents have access to avoidance
opportunities.
Philippe De Donder is a research professor
at CNRS and is affiliated with the Toulouse
School of Economics and the Institut d’Economie Industrielle (IDEI), also at
Toulouse. His main fields of research are
public economics, political economy and
industrial organisation. He has worked
extensively on the political economy of
social insurance and redistribution, with
contributions to the positive analysis of
income taxation, tax evasion, pension systems, environmental policy, education and
behavioural public economics.
This work relates to a paper he published
in 2010 with S. Blomquist and V. Christiansen in the American Economic Journal: Economic Policy (also as a CESifo
Working Paper). One of the arguments
put forward in support of public provision
of private goods is that, when complementary with labour supply, it can offset
the distortionary effect of income taxation
on labour supply. For this to work, however, certain restrictions must be imposed
on the level or the quality of the good that
is publicly provided. The authors show
that it is possible to find a role for public
provision even without such restrictions.
He is interested in all aspects of political
economy, including direct democracy
(majority voting), electoral competition,
the formation and behaviour of political
parties, and the comparison of democratic institutions (such as proportional vs
majoritarian representation).
WELFARE EFFECTS
RELIGION
OF
Dehejia
Rajeev Dehejia is currently on a
research stay at CES. A professor at the
Department of Economics and the
Fletcher School at Tufts University, he
will join the Robert F. Wagner Graduate School of Public Service at New
York University next September. Prior
to joining Tufts in 2006, he was at the
Department of Economics and the
School of International and Public
Affairs (SIPA) at Columbia University.
He is a research fellow at the National
Bureau of Economic Research
(NBER), and has held visiting professorships at Harvard, the London
School of Economics,
and Princeton.
His research interests
include econometrics,
development economics (child labour,
microcredit, and financial development and
growth), labour economics (labour
standards and financial incentives and
fertility decisions), and public economics (religion and consumption insurance). He received a PhD in Economics
from Harvard University in 1997.
Bulletin
The idea is to treat the publicly provided
good not as a good desired for its own
sake, but rather as a factor of production
required for the consumption of the other
private goods. The import of this assumption is that it enables the government to
provide the good for free without having
to worry about over-consumption.
They also show that in such cases efficiency requires marginal income tax rates
to be higher than in the absence of public
provision. Part of the marginal tax serves
the same role as a market price and conveys information about a real social cost
of working more hours. One of the conclusions is that economies with higher
marginal tax rates might have less severe
distortions than economies with lower
marginal tax rates.
Mr Micheletto is Assistant Professor in
Public Economics at the Faculty of Law
of the University of Milan and researcher
at the Uppsala Center for Fiscal Studies.
He holds a PhD in Economics from the
University of Milan.
7
Vol. 21, No. 2 | April 2011
Migration and Skills Shortages
GM Economics
Razin
Choi
Back in 1883, the idea of
the welfare state and the
threat it would bring to
free immigration was still
in its embryonic state in
Europe and had yet to be
brought to the US shores.
From one hundred years
before to one hundred
years after that, economists have argued in
favour of the free movement of peoples. In 1776, Adam Smith
labelled the restriction on immigration as
being just as debilitating as a restriction
on capital movements. Towards the end
of the 20th century, Milton Friedman
remarked that free immigration and a
welfare state are mutually exclusive. A
welfare state with open borders, he
argued, might turn into a haven for the
poor and needy from all over the world,
draining its finances and bringing the
welfare system to its knees.
Yet whereas free capital mobility is now
widespread, free migration is rare indeed,
as Assaf Razin points out. Germany is
only now about to open its borders to
migrants from some East European members who joined the Union seven years ago.
Given the demographic pressures facing
Europe today, the on-going restriction on
migration might seem surprising. In ten
of the European Union’s 27 member
states, the number of deaths is expected
to outnumber births in 2010. By 2015,
the EU as a whole is expected to experience negative natural population growth.
Yet Europe’s generous social benefits
have encouraged a massive surge of
“welfare migration” over the past two
decades. Twenty-six million migrants
now call Europe their home. This migration has been concentrated in the
unskilled sectors. Eighty-five percent of
all unskilled migrants to developed coun-
tries go to Europe, but only
5% of highly skilled
migrants do so.
The net fiscal burden of
immigration has been the
subject of numerous studies. While immigrants can
bring economic growth,
they can also be a cost to
the government through
dependence on welfare.
In a forthcoming book, Migration and
the Welfare State: Political-Economy
Policy Formation, Mr Razin, together
with Efraim Sadka and Benjarung
Suwankiri, provide a political economy
theory for the joint formation of policies
concerning the generosity of the welfare
state, and the skill mix of immigration.
While at CES, Mr Razin plans to continue his research on the policy implications
of how immigration policies favouring
high-skilled migrants need to take into
account educational quality, positing that
a selective immigration scheme based
solely on years of education will not be
as effective in identifying the highskilled as a points-based system where
ability (for example, language ability and
labour market experience) is considered.
Another important implication to look at
is that under free migration, the generosity of the welfare state acts as a magnet
for the unskilled. This suggests that harmonising the minimum welfare provision
within the EU may be an attractive option
to reduce the negative effect of the welfare state on the skill composition of nonEU immigrants under free migration.
Assaf Razin is the Friedman Professor of
International Economics at Cornell University and Professor Emeritus in economics at Tel Aviv University. He was a
long-time chairman of the Ifo/CESifo
Scientific Advisory Council.
Genetically modified (GM) crops are
gaining a foothold
in Europe. For
instance, the European Commission
recently approved
the cultivation of a
GM potato created
by BASF, a German
chemical giant, saying that it does not pose any health risks.
But, as E. Kwan Choi pointed out during his stay at CES, while the traditional
variety does not affect the DNA of the
GM crops, because each year the GM
seeds produced in a controlled environment are distributed to farmers, the
presence of GM crops makes it difficult
for the traditional producers to maintain
the DNA purity of their crops. Crosspollination occurs when pollen grains of
the GM crop are transferred to the stigma of the traditional crops.
Mr Choi devoted his research at CES to
the short- and long-run consequences of
genetic contamination on the markets
for the traditional and GM crops. He
hads explored the issue in his paper
“International Trade in Genetically
Modified Products,” published in International Review of Economics and
Finance. The paper investigates competition between two markets that sell
close substitutes: a traditional product
and a genetically modified one. Tightening an import quota on the GM product raises the prices of both goods and
hurts consumers. In the long run, an
import ban on the GM product does not
help competitive producers of the
genetically modified organism (GMO)free products but benefits only the
landowners in Europe.
Mr Choi is a professor of economics at
Iowa State University and City University of Hong Kong.
Bulletin
Munich Society for the Promotion of Economic Research (Münchener
Gesellschaft zur Förderung der Wirtschaftswissenschaft, CESifo GmbH)
is the international platform of Ludwig-Maximilians University and
the Ifo Institute for Economic Research.
President and CEO: Hans-Werner Sinn
Address: CESifo, Poschingerstr. 5, 81679 Munich (Germany)
Telephone: +49 (0) 89/9224-1410, Fax: +49 (0) 89/9224-1409
Editor: Julio C. Saavedra. Ifo News provided by Annette Marquardt.