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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 17 No. 2
April 2007
TAXING THE INFORMAL SECTOR
According to some sources, informal employment makes up 48% of non-agricultural employment in North Africa, 51% in Latin America, 65% in Asia, and 72% in sub-Saharan Africa. It
is a good proxy for the size of the corresponding informal economy. That economy is a juicy
target for tax authorities in the affected countries. Juicy, but elusive. Robin Boadway shows
how to bring this sector into the tax net.
(page 3)
POLITICAL VS. ECONOMIC BORDERS
IFO NEWS
(p. 4-5)
There is a clear discrepancy between political borders and the economic or environmental
sort. Not only are the latter clearly more porous than the former, but they do not exactly heed
the directives of national governments. Labour and capital mobility are a case in point, and
(page 2)
the subject of research conducted by Alexander Haupt while at CES.
FACULTY NEWS
(p. 5)
HANS MÖLLER SEMINARS
(p. 7)
MUNICH SEMINARS
COMMUNISM AND PRODUCTIVITY
It would appear that communism—and, for that matter, all economic systems— exert a lasting
influence on preferences. That could lie behind, for instance, productivity differences between
east and west German workers, as Nicola Fuchs-Schündeln’s research shows.
(page 3)
(p. 6)
FEATURED RESEARCHERS
Robin Boadway (p. 3)
Bev Dahlby (p. 5)
Barry Eichengreen (p. 8)
Jan Fidrmuc (p. 7)
Nicola Fuchs-Schündeln (p. 3)
Anke Kessler (p. 2)
Dan Kovenock (p. 7)
Christoph Lülfesmann (p. 2)
Holger Sieg (p. 7)
Hans-Werner Sinn (p. 8)
Albert Solé-Ollé (p. 8)
Elisabet Viladecans-Marsal (p. 8)
6TH MUNICH ECONOMIC SUMMIT
Europe’s rapidly ageing populations are going to be dissected at this year’s economic summit
in the Bavarian capital. More than 160 high-calibre participants from two dozen countries have
already confirmed their attendance.
(page 6)
SPEAKING TONGUES...
Having an official language in a club with 27 members and 23 tongues is no easy task.
Jan Fidrmuc is busily analysing the implications of various scenarios of linguistic reform
in the EU.
(page 7)
...AND DEVISING A SUITABLE FISCAL CONSTITUTION IN A FEDERATION
Not only cacophony threatens the smooth running of a sprawling federation. The appropriate kind of fiscal constitution and the transmission of strategic information therein are also
difficult to agree on. Christoph Lülfesmann and Anke Kessler are specialists in both
these areas.
(page 2)
IMPROVING THE EDUCATIONAL EXPERIENCE
The introduction of student fees is anathema in several European countries. It would shut the
door to higher education for poor students, it is claimed. Holger Sieg has devoted some of
his research to the subject and his model shows fees could be quite useful.
(page 7)
A SPECIAL PANEL DISCUSSION ON GLOBALISATION
Barry Eichengreen and Hans-Werner Sinn will hold a panel discussion on globalisation with
Georges de Ménil and Torben Andersen. The Economist’s John Peet will moderate. (page 8)
Online version of this issue available at www.cesifo.de
Vol. 17, No. 2 • April 2007
FISCAL FEDERAL CONSTITUTIONS
Kessler & Lülfesmann
How do fiscal federal institutions shape
economic outcomes? The fiscal arrangements between federal governments and
their local counterparts have recently
come under renewed scrutiny around the
world. Political and economic integration
or the disintegration of existing states
have forced some countries to reconsider
the design of their fiscal constitution.
Understanding the design of federal institutions is a central objective of Christoph
Lülfesmann and Anke Kessler’s research
agenda. They have studied the effects of
various fiscal constitutions, and how to
best balance responsibilities.
Mr Lülfesmann currently analyses dual
institutional systems in federations. In
such systems, the authority to initiate and
enforce policy is partly assigned to the
central, and partly to the regional level.
Federal policies are chosen by majority
vote at the central level. However, each
individual region is free to “contribute”
additional amounts before and/or after the
federal decision has been taken. Examples for dual regimes include federal mandates such as environmental standards,
federal and local school funding, and dual
provision of health care.
As a key step for the formal analysis, Mr
Lülfesmann shows the validity of the
median voter theorem in this quite complex dynamic setting. Preliminary results
show that switching from a pure centralised to a dual system is preferred by a
majority and, depending on the specific
design, even unanimously preferred by
all individuals within the federation. In
contrast, adopting the dual system may
be opposed by a majority if a fully
decentralised institutional system represents the status quo.
Anke Kessler, in turn, will pursue a project on communication in federal politics,
which studies the consequences and the
determinants of strategic information
transmission between political agents at
the local and the federal levels of government. The trade-off she investigates is the
following: since local representatives are
likely to be much better informed about
local preferences and needs than the federal government, assigning the power to
decide over public projects to the federal
government necessarily involves a loss of
information. This is true even if communication between regional and federal
agents takes place, because the former
will want to manipulate the information
they volunteer so as to strategically shift
policy choice in their favor.
This problem can be avoided under
decentralisation, where local representatives have no strategic motive to distort
policy choice. At the same time, however,
decentralisation involves a lack of coordination, because local policy makers tend
to ignore the impact of their policy choice
on the neighboring jurisdictions.
Both Anke Kessler and Christoph Lülfesmann are Associate Professors at Simon
Fraser University, Vancouver, Canada,
and both received their PhDs from the
University of Bonn. She is also an Associate in the Canadian Institute of
Advanced Research (CIAR).
MOBILITY AND HUMAN CAPITAL
While the immediate power of governments still ends at their national borders,
such boundaries no longer constitute serious barriers to the movement of production factors. And they have never stopped
pollutants, an issue that has received
increasingly greater publicity in recent
decades. This discrepancy between political borders on the one hand and economic and environmental boundaries on
the other hand is at the heart of a variety
of well-known problems, ranging from
revenue-eroding tax competition to inefficient environmental protection.
In his research Alexander Haupt, of the
European University Viadrina, analyses
how national and regional governments
cope with these challenges arising from
economic integration and international
externalities. One of his research areas
addresses the effectiveness of international environmental agreements and the
interplay between international trade and
environmental policy. Another field that
2
Haupt
he covers is economic integration and
the mobility of capital and labour. For
instance, in a paper written jointly with
Eckhard Janeba, they show that, somewhat surprisingly, a small decline in
migration costs of skilled workers benefits both skilled and unskilled workers,
while a substantial drop ultimately hurts
both groups.
Labour mobility will also play a crucial
role in his research during his stay at CES.
Bulletin
Jointly with Silke Übelmesser, of CES, he
investigates the relationship between
labour mobility, human capital accumulation and agglomeration. According to
conventional wisdom, labour market
integration enables mobile labour to get
employed where it is most productive. In
a world with scale economies and human
capital externalities, mobility also fosters
agglomeration of skill-intensive industries, thereby further enhancing aggregate
income. Haupt and Übelmesser qualify
this line of reasoning. They argue that,
under specific circumstances, labour
market integration might be detrimental
to human capital accumulation, aggregate
wage income, and welfare.
Alexander Haupt studied economics and
philosophy at the universities of Tübingen,
Glasgow and Bonn. His Masters degree is
from Bonn University and his PhD from
the European University Viadrina in
Frankfurt (Oder). After his PhD, he spent
a year at the Univ. of Colorado, Boulder.
Vol. 17, No. 2 • April 2007
TAXING THE INFORMAL SECTOR
AN EFFECT OF COMMUNISM?
Boadway
Fuchs-Schündeln
Many developing economies
have sizable informal sectors. These, by their very
nature, tend to be skimpy on
the “Render unto Caesar”
bit. In other words, they pay
less taxes than they should.
What to do about it? Finding
an optimal way of raking in
Caesar’s due is one of the
topics Robin Boadway, of
Queen’s University in Canada, will devote part of his research to
while at CESifo.
There are two camps in this debate: on
the one hand, there are those who advocate a VAT for these countries and, on
the other, those who argue that trade
taxes can be more efficient because they
bring informal firms into the tax net
indirectly, albeit while treating the formal sector inefficiently.
Resolving the debate involves analysing
the tax design in a model that is rich
enough to include such things as the
limited taxation of income and profits in
the formal sector, endogeneity of the
size of the informal sector, reforms of
tax administration and tax corruption,
and heterogeneity of the kinds of products and activities undertaken in the
informal sector.
Another project Mr Boadway will be
working on involves constructing a formal model of schedular taxation of various forms of income (labour, capital,
entrepreneurship, inheritances) with a
view to shedding light on the ideal form
of dual income taxation. These projects
involve collaborations with Motohiro
Sato of Hitotsubashi University in Tokyo. In addition to
these projects, he hopes to
explore some issues involving optimal policy when
households adopt non-standard forms of behaviour.
In some recently completed
work with Firouz Gahvari
published in the Journal of
Public Economics, he has
proposed a general treatment of the way
in which optimal taxation is affected by
the fact that consumption of goods takes
time. It turns out that the way in which
good and time interact has a determining
influence on tax treatment. For goods
for which consumption time is a substitute for leisure, the standard optimal tax
rules apply. Only in the case where consumption time is a substitute for labour
are optimal tax rates affected, and the
size of the effect depends on the timeintensity of consumption as well as on
whether nonlinear income taxation is
also in place.
Robin Boadway is Sir Edward Peacock
Professor of Economics at Queen’s University in Canada. He is Executive VicePresident of the International Institute of
Public Finance and past president of the
Canadian Economics Association. Currently, he is Editor of the Journal of Public Economics, and has served in the past
as Managing Editor of the Canadian
Journal of Economics and of the German
Economic Review. His research involves
various aspects of public economic theory, including optimal tax-transfer policy,
fiscal federalism and welfare economics.
SURVEY DATA IN ECONOMICS:
METHODOLOGY AND APPLICATIONS
Ifo’s Business Surveys Department will
hold a conference in Munich on October
19-20, 2007, aimed at discussing ongoing research on survey data and its application in economics. Theoretical and
empirical contributions on survey data in
economics are welcome, with a special
emphasis on methodology and the usage
of Ifo Business Survey data. Issues to be
addressed include methodology of business surveys, dealing with non-response,
quantitative vs. qualitative responses,
behavioural aspects in surveys, forecasting performance of survey data in business-cycle research, econometrics of survey data, and usage of micro-data in
empirical economics. See www.ifo.de
for the corresponding call for papers.
Bulletin
German Reunification was an economic shock of a size
rarely observed in
industrialised countries. It certainly
provided new and
unique challenges
for the German government, firms, and
households.
For
economists, German
reunification is fascinating beyond its implications for the
German economy. Nicola Fuchs-Schündeln uses this “natural experiment” to test
different economic theories.
In joint work with Matthias Schündeln,
Ms Fuchs-Schündeln analysed the effect
on precautionary saving behaviour of selfselection into occupations according to the
worker’s risk aversion and the occupation’s risk characteristics. By establishing
that such self-selection was absent for
individuals who made their occupational
choice in the former GDR, they showed
that the importance of precautionary saving for total wealth holding is much larger
than one would estimate in the presence of
self-selection. In subsequent work, she
investigated whether the saving behaviour
of East and West Germans after reunification is in line with predictions from a standard life cycle consumption model, finding strong evidence in favor of rational and
forward-looking consumption behaviour.
Together with Alberto Alesina, she documented a lasting effect of Communism on
the preferences of East Germans for a
strong role of the government. Their work
suggests that preferences are to a certain
extent influenced by the economic system.
While at CES, she will investigate the
sources of the relatively low labour productivity in East Germany. Based on a spatial model of the German labour market,
she analyses whether human capital depreciation at reunification is at the source of
the East-West productivity gap, or whether
job characteristics differ significantly
between East and West Germany.
Nicola Fuchs-Schündeln is an assistant
professor at Harvard University, and an
editor of The Economics of Transition. She
received her PhD from Yale University and
is a faculty associate of the Weatherhead
Center for International Affairs at Harvard.
3
Vol. 17, No. 2 • April 2007
IFO NEWS
IFO BUSINESS CLIMATE RISES AGAIN
The Ifo Business Climate Index for German industry and trade rose again in
April. The surveyed firms assessed both
the current situation as well as the outlook
for the coming six months more
favourably than in March. Germany is
profiting from the extraordinary international investment boom, which thanks to
Germany’s specialisation is having a
stronger cyclical impact here than in the
other major European countries.
In manufacturing the business climate
index rose again as well. With regard to
business in the coming six months the
relevant firms are even more confident
than in March. They are also more optimistic regarding exports despite the
stronger euro.
In retailing and wholesaling the business
climate also brightened noticeably. The
firms in these sectors gave more positive
appraisals of both their current situation
and their six-month outlook. In construction the business climate remains nearly
unchanged. The survey participants kept
to both their assessments of the current
situation as well as to the favourable
appraisal of the business outlook.
THE STATE OF THE WORLD ECONOMY
SPRING 2007
The major German economic research
institutes presented their Spring 2007
Joint Economic Forecast in April.
While the world economy remains robust,
the pace of the expansion is no longer
quite so fast as a year ago, primarily
because output growth in the United
States has slowed down, the world econo-
4
my is still in an upswing phase. Growth
continues to be high in the developing and
newly industrialising countries, not least
due to their increasing integration into the
international division of labour. The
industrialised countries, however, have
experienced a more moderate upswing.
The economic slowdown in the US has
not yet affected other regions, with the
upswing in the eurozone
and in Japan still continuing. Favourable developments in international
financial markets have
boosted economic activity worldwide, although
investors seem to have
become more cautious in
assessing the chances
and risks on international financial markets.
Concerns about inflation are keeping the
US Federal Reserve from easing its
slightly restrictive monetary stance
despite a weakening economy. Only after
inflation levels off in the second half of
the year are key interest rates likely to be
cut. The European Central Bank is at
present preparing the markets for another increase in key rates this summer.
During this year and next the pace of
economic activity in the industrialised
countries will gradually converge. In the
eurozone the upswing will be moderate
due to the combined effects of fiscal and
monetary policies. In the US, however,
the economy will slowly gather steam
again from mid-year. In 2007 and 2008
the world economy will again be supported by rapid growth in the newly
industrialising countries.
World GDP is expected to grow by
around 3¼% this year and next and thus
markedly faster than the average of the
past ten years. World trade will increase
by about 7½% in both years. The forecast is based on an oil price of US$65 per
barrel and a dollar/euro exchange rate of
1.32 in 2007 and 2008.
The German economy is experiencing a
strong upswing, thanks to a number of
Bulletin
factors that are reinforcing each other,
such as wage moderation, that has now
lasted for several years. The latter has led
to companies’ improving international
competitiveness and profits. In addition,
after the recession of 2001, companies
raised their profitability through a variety
of restructuring measures. Although this
initially raised unemployment, over time
the hiring of labour became again more
attractive. The strong expansion of the
world economy also acted as a stimulus.
Based on this diagnosis, the institutes
expect a continuation of the upswing this
year, although at a slower pace than last
year. A major reason is the restrictive
stance of fiscal policy that will dampen
GDP growth by an estimated ½%. The
institutes expect the European Central
Bank to raise its key interest rates by
another 25 basis points to 4% this summer. This will not stand in the way of a
lively economic expansion, however, as
bond rates continue to be low and wage
policy remains moderate, despite the fact
that, with a 2% increase, wages will rise
more than last year. The rise of wage
costs will be partially offset by a reduction of non-wage costs.
In 2007 real GDP is expected to increase
by 2.4% on average. Like last year,
domestic demand will be the biggest contributor to growth, as real disposable
income increases, primarily due to
employment growth. Consumers are also
likely to assess their medium-term
income and employment prospects somewhat more favourably than in the past.
Investment activity will remain lively,
with firms increasingly seeking to expand
their production capacity. Exports will
continue to support the economy, and
German businesses will likely maintain
their share of the world market. As the
upswing continues, the labour market
will further improve, but employment
will increase much more slowly than last
year. For the first time, the average number of unemployed will decline below the
4-million mark; compared to 2006, it will
decline by about 700,000 to about 3.75
million, a fall of 1.6 percentage points to
8.7%. Pushed up by the rise in the VAT
Vol. 17, No. 2 • April 2007
FISCAL IMBALANCES
Dahlby
rate, consumer prices will increase by
1.8% over last year.
Next year the upswing will continue at a
similar pace of expansion as in the course
of 2007. Fiscal policy will be largely neutral. The budget deficit will continue to
decline for cyclical reasons; given the
assumptions underlying this forecast, a
balanced budget is even probable. Private
investment will remain an important support of the economic expansion. In addition, building investment has emerged
from a long recession. The biggest
growth contributor, however, will be private consumption, with an increase of
around 2%, stimulated by the strong rise
in employment and income. The stimuli
from abroad will remain strong. Real
GDP will grow by 2.4% year-on-year, by
2.1% if working-day adjusted.
The number of unemployed will decline
more slowly than this year, coming to just
below 3.5 million. The rate of inflation
will increase to 1.8%, no longer notably
lower than in the rest of the euro area.
Although the price effects of the VAT rise
will have abated, the increase in labour
costs will accelerate. The institutes
expect that, on balance, negotiated wages
will no longer promote employment. The
higher increase in costs will negatively
affect business profits, and the profitability of investment will decline. In contrast
to past years, Germany will no longer
improve its price competitiveness.
The economic upswing has also spread
to eastern Germany. This year and next,
GDP will increase by 2.4%, i.e. at the
same pace as in west Germany. At 15%,
however, unemployment will remain
twice as high as in the west.
In addition to the risks for the forecast
from the international environment, there
is the domestic risk that the upswing
might be jeopardised by much higher
wage increases in 2008 than assumed
here. The German economy would lose
price competitiveness. In addition, higher
inflation risks would emerge; as a consequence, the ECB would raise interest rates
more. All of this would impair economic
activity and employment.
In case you
don’t know, the
term
“fiscal
imbalance” is
used in Canada
to describe a
monetary imbalance between
the Canadian
federal government and the
provincial governments. Delving into its
intricacies is one of the specialties of
Bev Dahlby and the subject of a lecture
he will deliver at CES during his stay at
CESifo in May.
A Professor of Economics at the University of Alberta, Mr Dahlby completed his
graduate studies at the London School of
Economics. His main area of research is
tax policy and fiscal federalism.
He was appointed by the Canadian federal government to the Technical Committee on Business Taxation (the Mintz
Committee), which issued a report on
reforming business taxation in Canada.
FACULTY NEWS
•Munich
offers the
best course
of studies in
economics
in
Germany, by
far. The latest university ranking conducted by the Focus magazine confirmed the dominant position of the University of Munich’s Faculty of Economics. In the overall ranking, Munich
claims the second place, with 67 points,
right behind Mannheim’s 68 points.
But as regards the course of studies in
economics, our Faculty sprinted clearly
ahead, with a score of 84 to Mannheim’s
71. They are followed by the Humboldt
University Berlin (68 points), Bonn
(58), and Freiburg (40).
In terms of research, Munich ranks
fourth behind Mannheim, Berlin and
Freiburg, with Bonn as fifth. A reason for
this could be that Economics in Munich
is a faculty in itself. The ranking conducted by the economics and business
daily Handelsblatt a short while ago
place Munich clearly on the top spot.
In 1998-99, he held a McCalla Research
Professorship at the University of Alberta and in August 2002 was the Abe
Greenbaum Visiting Fellow at the Australian Taxation Studies Program, University of New South Wales.
• Prof. Ray Rees will concentrate on
research during the 2007 summer
semester with the help of a grant from
the University of Sydney, Australia. He
will be replaced by Andreas Roider,
who is pursuing his post-doctoral degree
(habilitation) at the University of Bonn,
where he also obtained his doctorate in
2003. He has been a visiting researcher
at the London School of Economics and
the Stanford Graduate School of Business (GSB), and his main research interests are contract theory, theory of the
firm and behavioural economics.
WORKING PAPER MILESTONE
RESEARCH SEMINARS
Mr Dahlby has also served as a policy
advisor to the Alberta government,
worked on tax reform projects at the
Thailand Development Research Institute in Bangkok, and served as a technical advisor on an International Monetary
Fund mission to Malawi.
Summer Semester 2007
The CESifo Working Paper No. 2000 has
just been released. The lucky 2K went to
the paper “Firm Heterogeneity and the
Labour Market Effects of Trade Liberalisation”, written by Hartmut Egger and Udo
Kreickemeier. Presented at the 2007 Global
Economy Area Conference, it casts a fresh
glance at the effects of globalisation by
developing a model that incorporates workers’ fair wage preferences. Check it out.
Bulletin
14 May 2007*
Raphael Auer
Swiss National Bank
Pass Through in a Competitive Model of
Quality-Pricing to Market
21 May 2007 (topic to be announced)
Tomaso Duso
Wissenschaftszentrum Berlin
5
Vol. 17, No. 2 • April 2007
6TH MUNICH ECONOMIC SUMMIT
IFO BRIEF CONFERENCE
A new annual
conference
series, called
Ifo
BrIEF
(Ifo Brussels
International
Economic
Forum) and
co-organised by the Ifo Institute for Economic Research and the European
Union’s Committee of the Regions, will
start off in Brussels on June 12, 2007.
Aimed at strengthening the contribution
of Europe’s economic expertise to European economic policy-making, it will provide a platform for prominent decisionmakers from the world of European politics to meet with renowned economists
and discuss core questions pertaining to
Europe’s future.
Under the heading “Lisbon: Bringing the
Goalposts nearer”, the inaugural conference will address issues related to the
attainment of the goals set forth by the
Lisbon process, which aimed at making
the EU “the most dynamic and competitive knowledge-based economy in the
world by 2010”. The conference’s focus
will be placed on the implications of the
dramatic changes in the global division of
labour brought about by globalisation, the
challenges posed by the demographic shift
towards ageing populations, and the
demands placed by the Lisbon Agenda on
Europe’s education policy.
Further info at www.cesifo-group.de.
Europe’s population is ageing
fast. If nothing is
done to revert the
low birth rates,
its share of world
population, onequarter in 1900,
may fall below
5% by 2050.
This has all kinds of implications, from
the purely economic through to the political and social. The 6th Munich Economic Summit, to be held on June 21-22
in Bavaria’s capital, has made Europe’s
demographic decline its central theme
this year.
Some of the best minds in politics, academia, business and journalism will
gather in Munich to first review the situation across the continent, and then to
discuss possible strategies to raise fertility rates and to tackle the looming problems population ageing will bring with it.
The Summit has been divided into three
panels. The first one, Europe on the
Road to Gerontocracy, will attempt to
shed light on such questions as what the
economic implications of such a massive
shift are, and what this implies for the
nature of politics.
A second panel, Trouble Ahead for
Social Security Systems, will deal with
the so-called double-ageing phenomenon
sponsored by
Deutschlands große Tageszeitung
MUNICH SEMINARS
BMW Niederlassung München
Wegweisend und voller Wertschätzung für Sie.
Chaired by Hans-Werner Sinn (CESifo) and Marc Beise (Süddeutsche Zeitung)
Sponsored by BMW Niederlassung München
Monday, 6 pm, CESifo Conference Centre, Ludwig-Erhard-Hall, Poschingerstr. 5, Munich
6
14 May 2007
Prof. Paul Kirchhof
Director, Institute of Finance and Fiscal Law,
University of Heidelberg
Die Gefährdung des Wettbewerbs durch
Beschränkung der Freiheit
18 June 2007
Prof. Kurt Faltlhauser
Minister of State for Finance,
Free State of Bavaria
4 June 2007
Sabine Werth
Chairwoman, Berliner Tafel e.V.
Berliner Tafel und die Entwicklung
in Deutschland
9 July 2007
Prof. Ferdinand Dudenhöffer
University of Applied Science
of Gelsenkirchen
Topic to be announced
Topic to be announced
Bulletin
—steadily
decreasing birth
rates
coupled
with ever increasing life spans—
that has turned
the
developed
world’s age pyramids into age
mushrooms. Low
birth rates mean
fewer people paying for ever larger
legions of old folk for an ever increasing
number of years. Much has been said
about the effect of this on pensions, but
the effects on health care are equally precarious. What is the situation in Europe?
What is being undertaken to stave off a
meltdown? What can we learn from the
experience of other countries?
The last panel, Europe’s Childless Societies, starts from the fact that, somewhere along the road, Europeans stopped
investing in their future —in terms of
bringing forth children— in order to concentrate on enjoying the present. This
attitude is increasingly unsustainable.
The future, on present fertility trends,
looks grim. What can be done to revert
the situation? What can we learn from
those countries that buck the trend? What
are the tradeoffs between state intervention and free choice?
Vladimír Špidla, EU Commissioner for
Employment, Social Affairs and Equal
Opportunities, will deliver a keynote
address on the Summit’s first day, while
Ursula von der Leyen, Germany’s Federal Minister of Family Affairs, Senior
Citizens, Women and Youth, will deliver
the keynote speech on the second day.
The Summit is organised by the BMW
Foundation Herbert Quandt and the
CESifo Group Munich, in partnership
with The Times of London.
The generous contributions of a number
of sponsors make the Summit possible,
including Siemens AG, Roland Berger
Strategy Consultants, E.ON Energie,
Fulbright & Jaworski L.L.P., Hypo Real
Estate Group, and Swiss Re.
Vol. 17, No. 2 • April 2007
SPEAKING TONGUES
A BETTER EDUCATIONAL EXPERIENCE
Fidrmuc
Some three centuries ago,
Europe’s international language was Latin. Later, French
rose to prominence as the
tongue of diplomats and intellectuals. Naturally it would
duly become the language of
the European Union once that
club came into being. But, to
the great surprise of the
French, it didn’t turn out to be that way.
With 27 members now, the EU club has
taken on a decidedly Babylonish touch.
What to do? Well, ask Jan Fidrmuc. That
will be one of his topics of research while
at CES. In a paper written jointly with V.
Ginsburgh and S. Weber, “Ever Closer
Union or Babylonian Discord? The Official-Language Problem in the EU,” he
analyses the implications of various scenarios of linguistic reform in the EU. After
formulating an analytical framework for
determining the optimal number of official
languages, and discussing the politicaleconomy implications of such a reform,
they conclude that while a six-language
regime would entail both modest costs and
relatively low linguistic disenfranchise-
HANS-MÖLLER SEMINARS
Summer Semester 2007
8 May 2007*
Christian Dustmann
University College London
15 May 2007*
Gary E. Bolton
Penn State University
22 May 2007
Mattias Polborn
University of Illinois, Urbana-Champaign
Majority-efficiency and competitionefficiency in a binary policy model
5 June 2007*
Harris Schlesinger
University of Alabama
12 June 2007*
Per Krusell
Princeton University
19 June 2007*
Bernard Y. Yeung
New York University
26 June 2007*
Justin Wolfers
University of Pennsylvania
* The topics for this seminars are to be announced
Sieg
ment, such a regime is unlikely
to gain sufficient political support in the EU at present.
A further research topic for Mr
Fidrmuc at CES will be economic growth and institutional
change during transition. A
paper he is working on assesses
the role that the extent and
strength of pre-transition civil
society have played in determining subsequent institutional change and economic
development in post-communist countries
since 1985, while another studies the
impact on economic growth of investment
activities undertaken by the European
Bank for Reconstruction and Development in transition economies during the
first ten years of their existence.
Jan Fidrmuc is a Senior Lecturer in Economics at the School of Social Sciences
and Centre for Economic Development
and Institutions (CEDI), Brunel University.
His PhD (1999) is from CentER for Economic Research, Tilburg University. He
has also held positions at the University of
Bonn’s Center for European Integration
Studies, and Université Libre de Bruxelles.
STRATEGIC BEHAVIOUR
Kovenock
Dan Kovenock completed a research visit at
CES in mid April. A Professor of Economics in
Purdue
University’s
Krannert School of
Management in West
Lafayette, Indiana, he
received his BSc in
Mathematics and Economics from the Hebrew University of
Jerusalem and his PhD in Economics from
the University of Wisconsin-Madison.
While at CES, Mr Kovenock continued his
research programme on strategic behaviour
in contests. His current work in this area
focuses on two facets of the theory. The first
addresses dynamic contests with stage-specific and terminal prizes. The second
addresses contests involving multidimensional expenditures, such as the Colonel
Blotto game and its non-zero-sum variants,
in both static and dynamic settings. In three
lectures at CES he also presented theoretical
contributions from both of these research
projects, as well as applications thereof.
Bulletin
In the debate on
higher education
financing, nothing
incites the passions
more than the introduction of student
fees. A fact of life
in
Anglo-Saxon
(and other) countries, fees are all
but anathema in old
Europe: how on earth would poor students afford a university career?
They should read what Holger Sieg has
found with his research. In a recent paper
entitled “Admission, Tuition, and Financial Aid Policies in the Market for Higher Education”, written jointly with Dennis Epple and Richard Romano, he develops and estimates an equilibrium model
of the market for higher education,
whereby colleges seek to maximize the
quality of the educational experience provided to their students.
The model predicts student selection into
institutions of higher education, financial aid, educational expenditures, and
educational outcomes. The authors consider a change in the federal financial aid
formula that is targeted toward lower
income students. They found that the
income effect associated with this policy
causes some of the poorer students to
attend higher-quality colleges and the
reverse for some of the richer students.
As a consequence, the policy increases
access to high-quality education for
lower-income households.
Holger Sieg is a Professor of Economics
at Carnegie Mellon University. His main
areas of expertise are public and urban
economics. His previous research has
focused on provision of primary and secondary education as well as competition
among local school jurisdictions and
school districts. He has also written
extensively on topics in higher education
including admission, tuition and financial
aid policies as well as affirmative action.
While at CES, he plans to work on issues
that are related to the mobility of lowincome households and the dynamics of
metropolitan communities.
He recently received the prestigious
Alfred P. Sloan Research Fellowship.
7
Vol. 17, No. 2 • April 2007
TRANSFERS AND PARTISANSHIP
Solé-Ollé
DISCUSSING GLOBALISATION
Viladecans-Marsal
Does
partisan
alignment play any
role on the allocation of intergovernmental transfers
in federal systems?
Finding an answer
to this question
will be central to
Albert Solé-Ollé’s
research agenda while at CESifo.
The traditional literature on fiscal federalism justifies the use of intergovernmental
transfers on equity and efficiency
grounds. However, recent political economy papers suggest that tactical motives
are of paramount importance, grants
being allocated to the jurisdictions that
deliver most votes in exchange. However,
these papers fail to answer a fundamental
question: why should an upper-tier of
government be interested in delivering
transfers to governments controlled by
opposition parties, which will surely use
these funds to advance their electoral
prospects?. His findings this far suggest
that partisan alignment has a sizeable
effect on the amount of grants received by
local governments: aligned local governments received 40% more funds than
unaligned ones.
He plans to extend this line of research by
testing the hypothesis that co-partisans
receive more intergovernmental grants
because the electoral reward from transfers is higher when they are given to them
than to local governments controlled by
the opposition. To this end, he will examine data on electoral results and transfers
by three different grantors for the same
sample of Spanish municipalities during
the period 1993-2003.
A lecturer at the University of
Barcelona’s Faculty of Economics,
where he obtained his PhD in 1999, Mr
Solé-Ollé is also a researcher at the
Barcelona Institute of Economics.
Bulletin
AGGLOMERATION ECONOMIES
Agglomeration
economies: can be
divided into two
types: urbanization
economies (associated with a city's
population
and
employment levels
and the diversity of
its
productive
structure) and localisation economies
(associated with a city’s specialization in
one specific sector). Both exert an influence on the location of economic activities
This is one of the specialties of Elisabet
Viladecans-Marsal. Her research, which
has devoted special attention to geographical units of analysis by employing spatial
econometric techniques that allowed the
influence of agglomeration effects extending beyond a city’s limits to be considered,
demonstrated
that
agglomeration
economies influence the location of manufacturing activity, with most sectors being
influenced by urbanisation economies and
a few by localisation economies.
In line with this research, her current work
has the objective of deepening the study
of the agglomeration economies at the
micro-level. That is to say, the agglomeration economies that act at short geographical distances (for example inside a
metropolitan area or even, inside a city).
In fact, most of the recent literature concludes that for the knowledge-based
activities, the influence of agglomeration
economies is stronger at really small distances. In concrete, the purpose of the
research that she will do during her stay at
CESifo is to provide a first evaluation of a
publicly-promoted
knowledge-based
cluster in Barcelona
A lecturer at the University of
Barcelona’s Department of Statistics,
Econometrics and Spanish Economy,
where she obtained her PhD in 1999, Ms
Viladecans-Marsal is also a researcher at
the Barcelona Institute of Economics.
Two of the top economic minds on either
side of the Atlantic, Barry Eichengreen
(left) and Hans-Werner Sinn (right),
will hold a panel discussion on the goods
and ills of globalisation at the CESifo
conference centre in Munich on July 2.
Under the heading Capitalism and the
Forces of Globalisation, the discussion
will address in particular the question of
what we can learn about Europe’s economic future from its economic past.
After World War II the European economy grew rapidly and reached full employment, accompanied in the 1960s by a
sharp rise in purchasing power. Social and
political institutions played a significant
role in this process, with the welfare state
and labour market institutions widely
acknowledged as having contributed particularly to this economic success. However, in the 1970s, the welfare state
became more generous and labour market
institutions expanded – a policy which
from today’s perspective turns out to be
an impediment in coping with the challenges posed by globalisation.
Messrs Eichengreen and Sinn will present theses on the basis of the former’s
new monograph The European Economy
since 1945: Coordinated Capitalism and
Beyond (Princeton University Press,
2007) and the latter’s Can Germany be
Saved? The Malaise of the World’s First
Welfare State (MIT Press, 2007).
The panel will also include Georges De
Ménil (PSE, Paris) and Torben Andersen (Aarhus University), two leading
experts on the European economy, as discussants. The event, with attendance only
by invitation, will be chaired by John
Peet, Europe Editor at The Economist.
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
Chief Editor: Raji Jayaraman (RJ), CESifo Editor: Julio C. Saavedra (JS). Ifo News provided by Annette Marquardt (AM).
Contributor: Silke Uebelmesser (SÜ).