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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 16 No. 4
October 2006
MEETING WITH GIANTS
This year’s CESifo Venice Summer Institute included a very special conference. Two Nobel
laureates, a Nobel-laureate-to-be, a legendary CEO, central bank honchos, a top newspaper
economics commentator and a boatload of academics dissecting the European economy.
Davos, roll over.
(page 5)
DISTINGUISHED CES FELLOW
VENICE SUMMER INSTITUTE
Every year, the Center for Economic Studies (CES) at the University of Munich holds its
own prize award event. Not the Nobel prize maybe, but coveted nonetheless. This year’s
Distinguished CES Fellow award goes to Alberto Alesina.
(page 6)
(p. 5)
FACULTY NEWS
(p. 6)
MUNICH SEMINARS
FAIR WAGES AND TRADE LIBERALISATION
In many industrialised countries, trade liberalisation sends a chill down the spine of wage earners, particularly low-skilled ones. Harmut Egger’s research shows possible mechanisms to
insure fairness in wage setting.
(page 8)
(p. 8)
FEATURED RESEARCHERS
Philippe Aghion (p. 5)
Alberto Alesina (p. 6)
Annette Alstadsæter (p. 7)
Jeffrey H. Bergstrand (p. 3)
Amar Bhide (p. 5)
Thiess Buettner (p. 6)
Mario Draghi (p. 5)
Baláz Égert (p. 2)
Hartmut Egger (p. 8)
Karolina Ekholm (p. 8)
Bruno Frey (p. 5)
Robert Gordon (p. 5)
Eric A. Hanushek (p. 5)
Bas Jacobs (p. 5)
Erkki Koskela (p. 3)
Robert Mundell (p. 5)
Lucas Papademos (p. 5)
Edmund Phelps (p. 5)
Christopher Pissarides (p. 5)
Edward Prescott (p. 5)
Jeffrey H. Sachs (p. 5)
Jürgen Schroeder (p. 5)
Robert J. Shiller (p. 5)
Thomas Steger (p. 7)
Nicolas Treich (p. 2)
Stefan Voigt (p. 7)
David Wildasin (p. 6)
I’D LIKE TO HAVE THAT TAX REGIME, PLEASE
Trade liberalisation also leads to companies being active in many jurisdictions. And that means
different tax regimes. Annette Alstadsæter shows what influences their choice.
(page 7)
THE HOME-EFFECT OF MULTINATIONAL EXPANSION
What is the employment impact at home when a multinational firm decides to expand abroad?
Karolina Ekholm is one of the leading lights in this field.
(page 8)
STERN WARNING
Everybody wants to reduce public risk, but few want to foot the bill. The Nicholas Stern
report on global warming focused minds on this. Premonitorily, Nicolas Treich has already
laid the theoretical foundations to how this can be accomplished.
(page 2)
CONVERGENCE IN TRANSITION ECONOMIES
EU accession countries, among others, are working hard on achieving convergence with their
richer brethern. House prices are converging rapidly. Prices too. Balász Égert has done extensive research on many aspects of convergence in catching-up economies.
(page 2)
SOLVING THE GRAVITY PUZZLE
The so-called “gravity equation” has been instrumental in explaining much in international trade.
But not all. Those corners where it falters are the speciality of Jeffrey H. Bergstrand.(page 3)
FROM FORESTS TO MIRACLES
Erkki Koskela’s research definitely has a Finnish tinge: from the Finnish miracle to forest
economics, he is the authority on Suomi economics.
(page 3)
Online version of this issue available at www.cesifo.de
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Vol. 16, No. 4 • October 2006
PUBLIC RISK REDUCTION VS. PREVENTION COSTS
Treich
Public risks, exemplified by climatic
change or soil and water pollution, pose
great challenges for our societies. They
may affect millions of people, over several centuries, with irreversible consequences. However, although there is
often a strong social demand for public
risks prevention, expenditures in prevention cannot be infinite. We actually need
to find a way to compare the costs of prevention to its benefit in terms of risk
reduction, which includes life savings
and environmental preservation. The picture is complicated by several factors,
including how to account for the sources
of market failure in the public provision
of safety? How to understand risk management institutions and citizens’ behavorial responses? Nicolas Treich, from
the University of Toulouse, wants to
address this type of questions.
In a recent paper, “Statistical vs. Identified Lives in Benefit-Cost Analysis”,
written in collaboration with James K.
Hammitt, Mr Treich examines how information about heterogeneity of risk and of
policy-induced changes in risk influences
economic valuation and hence the out-
tified-victim effect”. The paper suggests
that benefit-cost analysis does not justify
a systematic bias in favor of identified
lives in the allocation of safety expenditures and that some political factors that
may explain this bias.
come of benefit-cost analysis. Economic
evaluation of projects involving changes
in mortality risks conventionally assumes
that lives are “statistical,” i.e., that risks
and policy-induced changes in risk are
small and similar among a population of
anonymous individuals. In reality, both
baseline risks and risk changes differ
among individuals because of differences
in exposure to factors presenting the risk
(e.g., sources of pollution) and differences in susceptibility (e.g., related to
age, sex, health status, genetics, behaviour). Yet, it is often noted that societies
may be willing to spend much larger
amounts to save lives that are “identified”
rather than “statistical,” a so-called “iden-
Mr Treich works at the Laboratoire
d’Economie des Resources Naturelles
(LERNA) and Institut National de la
Recherche Agronomique (INRA) at the
University of Toulouse. His research
applies microeconomic theory to issues in
the interfaces between risk, public policy
and environmental conservation. His published work includes an economic analysis
of the Precautionary Principle and empirical studies on climate change policies and
willingness-to-pay for mortality risk
reduction. His current research focuses on
behavioural and experimental economics,
and on theoretical and empirical studies on
public risk regulatory policies when citizens misperceive the risks they face.
While at CES, Nicolas Treich will pursue
his new research project on the public
economics of collective risks. He will
also give a three-lecture series on “Some
Economics of Risks Prevention”.
CONVERGENCE IN TRANSITION ECONOMIES
One of the more immediate effects of
European Union accession in new
entrant countries has been a hefty
increase in residential property prices, a
phenomenon particularly strong in Estonia, Lithuania and Slovenia. The factors
that drive these prices in transition
economies were the focus of Balázs
Égert’s research during his stay at CES
this October.
His research agenda here also comprised
a paper focusing on different aspects of
price level convergence in catching-up
economies, a matter he addressed in a
lecture series he gave here, covering also
exchange rates and monetary policy in
transition economies.
In a recent paper, he studied foreign
exchange interventions in emerging
Europe. His results reveal that while
largely ineffective on their own, central
bank communication and interest rate
steps considerably enhance the effective-
2
Égert
ness of actual interventions and that
unsterilised interventions are not necessarily more effective than sterilised ones.
Another paper he co-authored—to be
published in the Journal of Banking and
Finance—studies the determinants of real
exchange rate movements. Its results indicate that productivity gains in tradables
cause an appreciation of the real exchange
rate via both tradable and nontradable
prices in transition economies, while they
Bulletin
lead to a depreciation of the real exchange
rate of tradables in OECD economies that
overcompensates the appreciation due to
nontradable prices. These differences are
due to the different impact of the fundamentals on the real exchange rate,
depending on the time horizon studied.
Mr Égert is an economist at the Austrian
Central Bank and obtained his PhD from
the University of Paris X-Nanterre in
2002. Since 2003, he has been an economist at the Austrian central bank. During the last 4 years, he has visited the
central banks in Estonia, Finland, Hungary and the Czech Republic as well as
Bruegel, a Brussels-based think-tank.
His works have been published in a
number of international journals, such as
the Journal of Banking and Finance,
Journal of Economic Surveys, Journal
of Comparative Economics, World
Economy, Economics of Transition and
Economic Systems.
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Vol. 16, No. 4 • October 2006
SOLVING THE GRAVITY PUZZLE
FROM FORESTS TO MIRACLES
Bergstrand
Koskela
For nearly a half century,
international trade economists
have been using a “gravity
equation” to explain empirically bilateral international
(and even intra-national)
trade, investment, and migration flows. Akin to Newton’s
“Law of Gravity,” the international trade gravity equation
explains (typically using
cross-sectional or panel data
and a log-linear specification) bilateral
flows in terms of two countries’ economic
sizes (GDPs) and the bilateral distance
between their economic centers (and then
a host of other variables proxying for
trade, investment and/or migration costs).
Since 1990, the gravity equation has
become the workhorse for empirical
international trade, investment, and
migration analysis, owing partly to formal theoretical foundations provided in
the 1980s by Jeffrey H. Bergstrand,
who will be visiting CES in late Octoberearly November. Independently and at
the same time, other major contributors
to these foundations came from James E.
Anderson at Boston College, Paul Krugman (now at Princeton University) and
Elhanan Helpman at Harvard University.
While the gravity equation has been used
extensively over the past half century to
analyse the effects ex post on trade of
economic integration agreements such as
the EU and the European Free Trade
Association, empirical researchers have
often found economically implausible
effects of such agreements on members’
trade. However, typical empirical studies
assume in their methodologies that such
agreements are determined randomly. In
reality, governments of country pairs
likely self-select into these agreements,
often for reasons (unobservable to the
empirical research) that may be related
to their level of trade (relative to some
“natural” level).
Bergstrand has been exploring in
research (jointly with Scott Baier of
Clemson University) the effect of selfselection on such estimates and has
found that previous estimates underesti-
mate considerably the likely
effects of such agreements on
members’ bilateral trade.
Another area of Bergstrand’s
research, conducted jointly
with Peter Egger of LMU,
CESifo and the Ifo Institute,
is developing further formal
general equilibrium theoretical foundations for the gravity equation of foreign direct
investment (FDI) flows. While the theoretical foundations for the gravity equation for international trade flows are well
developed, there is still no formal theoretical foundation for the gravity equation
for FDI flows—much less one fully consistent with the trade gravity equation.
A fascinating puzzle in the international
trade and investment literature is that the
prevailing 2-country-2-factor-2-good
model of multinational firms suggests
that—if two countries are identical in
terms of economic sizes and relative factor endowments (and all else is constant)
—the country pair will maximize their
bilateral FDI, but their international trade
should be zero! That is, bilateral intraindustry FDI necessarily displaces completely bilateral intra-industry trade. This
is not only rejected in all careful econometric work, but is in direct conflict with
even the most casual observation. The
US and Western Europe are approximately identical in economic sizes and
relative factor endowments. Although
their bilateral FDI flows are the largest in
the world, so are their bilateral trade
flows. With Peter Egger, Bergstrand has
developed a theoretical foundation for
the FDI gravity equation, in a manner
that also explains simultaneously both
the trade gravity equation and this puzzle
—using an N-country model allowing
national and multinational firms and
human and physical capital (alongside
unskilled labor).
Jeffrey H. Bergstrand is a Professor of
Finance and Business Economics at
Notre Dame University. He obtained his
PhD in Economics at the University of
Wisconsin in 1981 and is a specialist in
International trade flows and finance.
Bulletin
During his stay at
CES in October,
Erkki Koskela,
Professor of Economics at the University of Helsinki
and Director of its
Research Unit of
Economic Structures and Growth,
continued to pursue his research in
a variety of fields.
One of his research topics examined the
equilibrium unemployment and its potential determinants by delving into the
interaction between investment, production market competition and equilibrium
unemployment, both theoretically and
empirically, by using panel data from
OECD countries.
Another area studied optimal labour and
capital taxation under imperfectly competitive labour markets, considering as
well the role of efficiency wages, by
attempting to answer the question of
what the effects are of revenue-neutral
changes in tax progression and tax structure on wage formation, worker effort
and thereby labour productivity and
equilibrium unemployment, both under
exogenous and endogenous outside
option for workers.
A third area was forest economics, where
Mr Koskela continued working on a book
that will bring researchers and graduate
students up to the current state of knowledge on the subject. While mainly concentrating on theoretical issues, the book
will also provide several new results in
various sections.
He is also working on a book entitled
“Finnish miracle: from crisis to high
growth”, aiming to analyse how Finland
coped with the major changes in its economic environment, which initially led
to a big boom, then a huge crisis and
finally to a strong economic renewal.
Particular interest will be devoted to
shedding light on the question of why
high economic growth and high unemployment developed simultaneously during the period in question.
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Vol. 16, No. 4 • October 2006
IFO NEWS
IFO ECONOMIC FORECAST 2006/2007:
THE UPSWING CONTINUES
The Ifo Business Climate Index for
industry and trade in Germany improved
in October. The surveyed firms again
assessed their current business situation
somewhat more positively. For the first
time in three months their business
expectations were also more confident.
These survey results indicate that the
economic expansion will continue
despite the increase in VAT next year.
The upturn in the German economy
intensified considerably this year.
Exports continue to increase strongly,
unlike domestic demand. In light of ongoing, robust expansion of the world
economy, exports of goods and services
will grow by 10% this year. The further
improved sales and profit expectations of
businesses and the increased rate of
capacity utilisation have led to an
increase of plant and equipment spending of nearly 7%.
Construction investments have
also risen, ending a ten-year
slump. Private consumption has
only recovered hesitantly, but
will be stimulated in the second
half of the year by purchases
made before the VAT hike takes
effect in January. Real GDP will
increase this year by 2.3%, or,
after working-day adjustments,
Apparently impervious to impending VAT increase
by 2.5%. This is the secondIn manufacturing the business climate
highest growth rate in the past ten years.
index rose. While the assessments of the
The boost in the capacity utilisation rate
current business situation remained
has prompted companies to take on new
favourable, firms were more confident
staff. The unemployment rate will
regarding the six-month outlook than in
decrease this year by around ¾ percentSeptember. Their export expectations
age points to 10.4%.
were also more favourable than in the
previous month. In construction the busiThe fiscal policy has shifted to a noticeness climate improved minimally, with
ably restrictive course. On balance, the
slightly more positive appraisals of the
structural deficit rate will be reduced by
current situation and similar business
fiscal-policy measures by 0.9 percentexpectations than in the previous month.
age points in 2007. In light of this, conIn wholesaling the responses were clearsiderable insecurity exists about
ly more positive than in September both
whether the upswing is already so conwith regard to the current situation and
solidated that aggregate capacity utilithe business outlook. Retailers also
sation will continue to increase next
reported an improved business situation,
year. The insecurity is also a result of
but their appraisal of the business outvarious assessments of which stage of
look was clearly more pessimistic, leadthe business cycle the German economy
ing to an overall worsening of the busiis currently going through.
ness climate in retailing.
Some of the institutes participating in the
In eastern Germany, in contrast to the
Joint Analysis expect economic activity
federal average, the business climate
in Germany to slow down noticeably in
index fell slightly.
2007. Domestic demand will remain
JOINT ECONOMIC FORECAST OF GERMAN
expansive but is not yet sufficiently conECONOMIC RESEARCH INSTITUTES
solidated. In particular, the outlook for
earnings has not improved to the extent
Twice a year (in spring and autumn) the
that a sustainable increase of employIfo Institute collaborates with five other
ment and private consumption can be
economic research institutes to prepare
expected. All in all, total economic outjoint forecasts for the world economy
put will continue to increase in the
and the German economy.
4
Bulletin
course of next year but only at a rate that
corresponds to a moderate growth trend.
Other institutes see indications that the
upswing is now so strong that the dampening factors will only have a short-term
effect on the expansion and that afterwards capacity utilisation will continue
to increase perceptibly. In this view the
improvement on the labour market will
continue so that earnings will increase
during the forecast period and the expansion will be supported more and more
also by private consumption.
The present indicators provide no
unambiguous signals for determining
which of these scenarios is more likely.
On the one hand, the business expectations of the enterprises have clouded
over in recent months; on the other
hand, the improvement of the labour
market situation could be indicative of a
robust economic development. The
forecast for 2007 is complicated by further risks. Since VAT has never been
raised so strongly in Germany, it is difficult to estimate the extent to which fiscal policy will dampen economic activity and how strong the advance-purchase effects will be.
After weighing up various arguments,
the institutes have agreed on a middle
variant. They forecast for 2007 that the
upswing will continue at a slower speed
than this year. GDP will increase accordingly by only 1.4% for the year. Investments in plant and equipment will
remain the key driving force and will
increase again strongly. Private consumption will stagnate, on average for
the year, since real incomes will be burdened by fiscal-policy measures by
approximately one percentage point.
The advance purchases made this year
will also be felt. This factor alone will
mean that the rise in real GDP in 2007
will be ¼ percentage point lower than
without this advance-purchase effect.
Export growth will be weaker due to the
slight cooling of the world economy,
while slack domestic demand will dampen the increase in imports. The inflation
rate will probably increase to 2.3%.
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Vol. 16, No. 4 • October 2006
MEETING OF GIANTS:
CESIFO VENICE SUMMER INSTITUTE 2006
The increase in employment should continue in the coming year, but at a by far
lower rate than this year. On average for
the year, the unemployment rate will
decrease from 10.4% to 9.9%. The government deficit in relation to the gross
domestic product will fall from -2.4%
this year to -1.4% next year.
IFO INSTITUTE WINS THE SCIENCE
INSTITUTE COMMUNICATOR AWARD 2006
“I feel like I am surrounded by
giants,” were the awestruck words
of Bas Jacobs when his turn came to
present a paper at the conference on
Perspectives on the Performance of
the Continent’s Economies, held
within the framework of the CESifo
Venice Summer Institute last July
and organised jointly with Columbia
University’s Center on Capitalism
and Society.
Its constant presence in the media
and the positioning of a varied
mixture of topics
were the basis for
awarding the Ifo
Institute with the
Science Institute
Communicator
Award for 2006,
presented this year for the second time
by Media Tenor. From July 2005 to June
2006, the Ifo Institute achieved, in comparison to the other economic research
institutes, the largest number and variety
of reports in the leading German media.
And Jacobs was right: the participant list
read like a Who’s Who of the international economics elite.
The Media Tenor Awards for variety in
reporting are presented annually in various categories to businesses, institutions
and organisations that have been reported on in the media in a particularly
broad-scale fashion in comparison to
their competitors.
NEW MEMBERS OF THE
IFO SCIENTIFIC ADVISORY COUNCIL
The rest of the participants were not
exactly run-of-the-mill either: Jeffrey
Sachs, a globe-spanning economic advisor to governments far and wide who has
been repeatedly ranked among the
world’s most influential people by Time
magazine; Amar Bhide, who discovered
the venturesome side of consumption;
Philippe Aghion, one of the minds
behind the theory of Creative Destruction;
Christopher Pissarides, the mind behind
Job Destruction (and job creation);
Robert J. Shiller, author of New York
Times bestseller Irrational Exuberance;
Robert Gordon, the soul behind the
Rational Expectations and an acknowledged expert on productivity growth.
Bruno Frey, from the University of Zurich and 2005
Distinguished CES Fellow,
and Eric A. Hanushek,
from Stanford University,
have been elected to the Ifo
Institute’s Scientific Advisory Council. Prof. Hanushek
has also decided to act as a
Research Professor at the Ifo
Institute, working particularly closely with the Human
Capital and Innovation
Department. They will
replace Robert Solow and
Oliver Blanchard, who
retired from the council.
Bruno Frey
(top) and
Eric A.
Hanushek
(bottom)
Robert Mundell, of Mundell-Fleming
fame, and Edward Prescott, one of the
fathers of dynamic macroeconomics,
were two of the Nobel laureates present.
Joseph Stiglitz was to attend as well, but
was impeded at the last second.
That’s not all. One of the conference’s
organisers, Edmund Phelps, was to
receive the 2006 Nobel prize in a few
weeks’ time. And Jacobs himself was presenting a paper he had written jointly with
James Heckman, another Nobel laureate
who couldn’t make it to the conference.
The list goes on. Among the 36 participants was Lucas Papademos, European
Bank Vice-President, who was joined by
Mario Draghi, Governor of the Bank of
Italy, and by Jorma Ollila, one of the
modern time’s icons of successful corporate management at the helm of Nokia
and now at Shell. They gave a keynote
speech at the conference dinner, held on
Bulletin
Nobel laureates Robert Mundell and Edward
Prescott, chatting with Jürgen Schroeder
one of Venice’s primemost locations: the
Guggenheim Museum, on the Grand
Canal just off San Marco square.
Martin Wolf, associate editor at the
Financial Times, kept the academics on
their toes: an
attentive listener,
he
could not but
notice that
Jeffrey Sachs
and Edward
Organisers Edmund Phelps
Prescott
and Hans-Werner Sinn
posited rather
opposing ideas, and he wanted each one
to say why the other one was wrong. “I
want to see some blood”, he said.
That he got: during breaks, during lunch,
at discussion time. Lively debates raged
on, for instance, why the EU should look
up to the US as an example worth following, when a much better—and closer—one were the Scandinavian countries
(Jeffrey Sachs). Europeans are not overtaxed, he contended, but undertaxed.
Robert Gordon, in turn, making a broader analysis of living standards based on
economic welfare rather than crude GDP,
argued for the value of Europeans’
greater leisure time.
Small wonder that Jürgen Schroeder, a
professor at the University of Mannheim, would comment that “there are
seldom conferences where you have such
a strong feeling that it was worth it: the
technical level, the intensity, the focusing
on the issues at hand”.
Robert Mundell summarised a generalised feeling among the participants: “I
wish there were every year a conference
such as this.”
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FACULTY NEWS
THE 2006 DISTINGUISHED CES FELLOW AWARD
Alesina
• Mercator professorship: On August 1,
2006, Thomas Stratmann started to
reinforce the faculty for one year. He
studied economics at the Free University Berlin and then at the University of
Maryland, where he obtained his doctorate. He is now a professor at the
George Mason University, Fairfax, Virginia. While at LMU, Stratmann will
further pursue his research and give
courses for students and postgraduates.
In the winter semester 2006/2007 he
will give lectures on Applied Empirical
Economics and will offer a seminar
dealing with the political and economic
consequences of private and public
election campaign financing.
• Top marks: The newest ranking by the
German finance and business daily
Handelsblatt confirms the LMU Faculty of Economics as the best in Germany. According to the ranking,
LMU’s Faculty of Economics is the
strongest in terms of research in Germany, coming second in the Germanspeaking world only to Zurich. The
report also sees a two-tier faculty community emerging: A small top-level
group that are internationally competitive and attract the country’s best rising stars in the field, and a large group
of about 50 faculties that are not even
close to achieving international standards. LMU’s economic faculty is very
proud of leading this top echelon.
Impressive was also the showing of the
Munich economists in the researcher
ranking published by the same newspaper and the top spots attained in it by
many of our young elite economists.
• Junior professorship: Marco Runkel
was appointed as junior finance professor for three years.
• ECONnect gets going: This new program of the Alumni Club puts 30 outstanding students in contact with top
companies, enabling them to gain experience and, perhaps, clinch their dream
job. The participating companies offer a
range of openings for economics students, while a number of workshops are
offered to help complement the students’ theoretical education.
6
Every year, the Center for Economic
Studies (CES) honours an economist
who has made exceptional contributions
to the field of economics by awarding
him the “Distinguished CES Fellow”
prize. The awardee holds a three-part
lecture series —the Munich Lectures in
Economics—in November. This year’s
Distinguished CES Fellow, Alberto
Alesina, is awarded the prize for his outstanding contributions to the field of
political economy.
Alberto Alesina was born in Italy in
1957. He graduated summa cum laude
from Bocconi University in Milan in
1981 and obtained his PhD in Economics
from Harvard in 1986. For two years he
taught at Carnegie Mellon University,
returning to Harvard as an assistant professor in 1988 with a joint appointment
in the Economics and Government
departments. In 1993 he received joint
tenure in these two departments, the first
ever. Five years later, he moved full time
into the economics department.
Alesina has been one of the leading
forces behind the renaissance of political economics, now one of the most rap-
idly growing and
exciting fields in
economics.
In
1990 The Economist named him
one
of
the
world’s
eight
best economists
under the age of
forty and most
likely to win a
Nobel Prize in the future. With his PhD
thesis in the mid eighties, he turned the
attention of those working on economic
policy to the question of elections and
party competition by revisiting the literature of political business cycles with
fresh perspective.
This year’s Munich Lectures are entitled
“On the Choice of Institutions”, and will
explore the deeper socio-political forces
which determine both electoral rules and
policy outcomes. The lectures will commence on Tuesday, November 14 at 6
p.m. in the Grosse Aula in the University of Munich, with subsequent lectures
on the 15th and 16th. You are cordially
invited to attend.
FISCAL FEDERALISM CONFERENCE
The division of fiscal and
political responsibilities
among governments has
gained increased importance in the face of the
wide-ranging changes in
institutional structures and
economic conditions taking
place within and among countries.
Recognition of this fact led the Institute
for Federalism and Intergovernmental
Relations (IFIR) at the University of Kentucky to organise, jointly with CESifo, a
high-level conference labelled “New
Directions in Fiscal Federalism”.
Held in Lexington, Kentucky, on September 14-16, and organised by David
Wildasin of IFIR and Thiess Buettner of
CESifo (pictured), the conference
analysed the tax, expenditure, and debt
policies of different levels of government,
as well as their interactions. Among the
keynote lectures presented by leading
Bulletin
researchers in the field were
Why Federalism?, by
Robert Inman; Voluntary
Matching Grants Can Forestall Social Dumping, by
Jean
Hindricks
(with
Jacques Dreze and Charles
Figuieres); The Dilemmas
of Tax Coordination in the Enlarged
European Union, by Peter Birch Sørensen
(with Jens Brochner, Jesper Jensen and
Patrick Svensson); Second-Generation
Fiscal Federalism: Implications for
Decentralized Democratic Governance
and Economic Development, by Barry
Weingast; Protecting the Welfare State
from International Migration, by John D.
Wilson, and The Property Tax Incidence
Debate and the Mix of State and Local
Public Expenditures, by George Zodrow.
The papers presented at the conference
are available at:
http://www.cesifo.de -> Conferences
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Vol. 16, No. 4 • October 2006
CORPORATIONS’ CHOICE OF TAX REGIME
SOURCES OF ECONOMIC GROWTH
Alstadsæter
Steger
model of dual income taxation. Corporations could thus
shift tax regime by making
marginal changes in the ownership structure. Alstadsæter
and her colleague Knut R.
Wangen utilize a rich panel
data set with full coverage of
all Norwegian corporations to
analyze how the tax system
affected corporations' choice
between the two tax regimes.
Different
organisational
forms have different characteristics regarding risk, ownership concentration, start-up
costs, access to capital, and
liability of the owners. But
various organisational forms
also face different tax codes,
presumably affecting businesses’ choice of organisational form.
During her research stay at CES, Annette
Alstadsæter will work on a project that
sets out to measure the tax distortion to
the choice of organisational form.
A related issue is studied in her recent
working paper "The Achilles Heel of the
Dual Income Tax - The Norwegian
Case". There she analyzes the tax incentives for self-employed individuals to use
the corporate form as a tax shelter.
During the 1992-2005 period, Norwegian
businesses could shift tax regime without
changing organisational form, and thus
non-tax factors played a smaller role in
the choice of tax regime. Corporations
faced different taxation depending on the
number and composition of owners.
Widely held corporations were taxed
according to the corporate tax code,
while closely held corporations were
taxed under a hybrid system, the split
Annette Alstadsæter obtained her PhD
from the Norwegian School of Economics and Business Administration, Bergen,
and is now a Research Fellow at Statistics
Norway, Oslo. In addition to her interest
in corporate taxation, she is involved in
several projects that analyse higher education as a consumption good.
LAY PARTICIPATION IN COURT SYSTEMS
Voigt
Stefan Voigt’s research project at CES focuses on “The
(Economic) Effects of Lay
Participation in Court Systems–A Cross-Country Analysis”. Lay participation in judicial decision-making can be
interpreted as a renunciation of
an additional division of labor.
From an economic point of
view, this renunciation is
expected to cause foregone benefits in
terms of the costs as well as the quality of
judicial decision-making. In order to be
justified, these foregone benefits need to
be overcompensated by other benefits of
at least the same magnitude.
Legal philosophers like Montesquieu,
Hegel and Tocqueville have indeed
argued that lay participation in judicial
decision-making would have additional
benefits reaching far beyond the realm of
the legal system narrowly understood.
Voigt’s paper tests some of
their arguments in favor of lay
participation empirically. The
estimates are based on a new
dataset that was generated for
this study.
Together with his co-authors
Lorenz Blume and Michael
Ebeling, Voigt recently finished a manuscript that deals
with the question of whether
the delegation of judicial competence
beyond the nation-state can make promises of governments to enforce private
property rights more credible. They found
that former British colonies that kept the
Judicial Committee of the Privy Council
as their highest court of appeals even after
becoming sovereign did indeed experience a better development on a number of
scores than those former colonies that did
not. The paper is scheduled to appear in
the Journal of Development Economics.
Bulletin
What are the driving forces behind
international
income
convergence (or divergence)? Or to dig
deeper still, what
are the sources of
economic growth?
These are some of
the
questions
Thomas Steger’s research attempts to
elucidate.
A recent paper he wrote with Volker
Grossmann deals with the relationship
between product market competition and
economic growth. The study investigates
how an institutional environment that is
conducive to anticompetitive conduct
affects the R&D incentives in the economy. The novel finding is that anticompetitive effort and R&D are unambiguous
complements for incumbent firms. This
result is not only important for understanding the empirical relationship
between private business enterprise
research and market entry barriers, but
also clarifies the role the regulatory
framework might play for R&D, economic growth, and social welfare in
closed and open economies.
Another current project is devoted to the
consequences of financial globalisation.
In a recent working paper he investigated whether capital market integration
spurs economic growth, presenting evidence from the first era (pre-WW1) of
financial globalisation. The main result
shows that there is indeed a strong and
robust impact of the degree to which an
economy is integrated into the global
capital market on subsequent growth.
This finding is important since the
majority of studies, which primarily
focus on the modern period (post-WW2),
typically report mixed evidence.
His second current research project on
“growth in the open economy” aims at
understanding the role of trade in intermediate goods, an increasingly important
link in the globalisation-growth nexus.
Mr Steger, of ETH Zurich, has published
in journals such as JEDC, JDE, Scandinavian Journal of Economics, Economics
Letters, and Macroeconomic Dynamics.
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Vol. 16, No. 4 • October 2006
FAIR WAGES AND TRADE LIBERALISATION
DISSECTING CONTESTS
Egger
Ekholm
Recent contributions to the
theory of heterogeneous firms
have dramatically changed
our understanding of how
globalisation affects economic activity. While previous
research was concerned with
the expansion and contraction
of different sectors, it is the
intrasectoral perspective and,
in particular, the empirically
observed selection of the best
firms into export status that has sparked a
lot of interest in the recent past. Whereas
this selection mechanism seems to be well
understood by now, its interaction with
labour market imperfections has not yet
been considered in economic research.
This is an important shortcoming as the
labour market implications of globalisation are a prime concern for policy makers
and the general public alike.
In his current research, Hartmut Egger
introduces a fair wage-effort mechanism
into a general equilibrium framework
with firm heterogeneity to study the interaction of firm selection and labour market imperfections in determining the consequences of trade liberalisation for
domestic workers. With respect to the
labour market, he considers a source of
imperfection that has considerable empir-
ical support: fair wage preferences of workers.
In a recent paper, co-authored
by Udo Kreickemeier, Egger
uses this theoretical framework to study product market
integration between symmetric countries. One notable
feature of this paper is the
assumption of firm-specific
wage payments. In a setting
with heterogeneous producers, this leads
to wage differentiation among workers
with the same individual characteristics
(including their education levels). This
gives a theoretical framework which provides novel insights into how product market integration affects within-group wage
inequality. During his stay at CES, Egger
continued this strand of research by working on a paper that looks at the role of
labour market institutions in a setting with
heterogeneous firms and fairness preferences of workers.
Hartmut Egger is a senior assistant at the
Socioeconomic Institute of the University
of Zurich. He is a research fellow at The
Leverhulme Centre for Research on Globalisation and Economic Policy (GEP) in
Nottingham. He holds a doctorate in Economics from the University of Zurich.
MUNICH SEMINARS
Deutschlands große Tageszeitung
Chaired by Hans-Werner Sinn (CESifo) and Nikolaus Piper (Süddeutsche Zeitung)
Monday, 6 pm, CESifo Conference Centre, Ludwig-Erhard-Hall, Poschingerstr. 5, Munich
6 November 2006
Clemens Fuest
University of Cologne
Führt Steuervereinfachung zu einem gerechten
und effizienterem Steuersystem? Eine
empirische Analyse für Deutschland
27 November 2006
Wolfram Richter & Friedrich Breyer
Debate
Gesundheitsfonds - Pro und Contra
Bulletin
11 December 2006
Kurt Biedenkopf
Former Minister-President, Saxony
Zwischenbilanz der Deutschen Einheit
15 January 2007*
Edward G. Krubasik
Former Member of the Board of Directors,
Siemens AG
* The topic for this seminar is
yet to be announced
In these days of
fast-paced globalisation,
the
question of how
a
company’s
decision
to
expand abroad
impacts on the
demand
for
labour at the parent firm keeps
workers, unions
and labour ministers awake at night.
For answers, they could turn to Karolina
Ekholm, of Stockholm University, who
not only has conducted extensive
research on the matter, but will continue
to do so during her visit at CES. Together with Sascha O. Becker and MarcAndreas Muendler, she will deepen a
study of the labour market effects of foreign investments by German and
Swedish firms.
The study, based on detailed firm-level
information on the firms’ foreign activities and on worker-level information on
the labour market characteristics of
employees, uses data with linked information on employers and employees,
making it possible to estimate more precisely than previously what effects this
expansion has on employment levels in
the investing countries. In other words,
her work provides an insight into how
many jobs are gained or lost in the home
country for every job created by a multinational in an offshore location.
Karolina Ekholm is Associate Professor
at the Department of Economics, Stockholm University. Her research deals with
international trade and international
investment. She has carried out several
studies on the causes and consequences
of foreign direct investment and the
expansion of multinational firms. She is
also a member of the Swedish Economic
Council (advisory board to the Ministry
of Finance).
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).