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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.