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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).