Global Competition for Mobile Resources: Implications for Equity, Efficiency, and Political Economy

International integration of markets for labor and capital has far-reaching policy implications in economies where governments pursue extensive programs of redistribution through tax and transfer policies. The large fiscal impacts that result from movement of high- and low-income populations, as well as of capital, affect the benefits, costs, and political payoffs of redistributive policies, creating incentives for fiscal competition that may limit the extent of redistribution over time. Migration and capital flows are dynamic adjustment mechanisms, analysis of which can shed light on the consequences of structural changes such as globalization of factor markets and EU enlargement.Fiscal Competition

What do internal capital markets do ? Redistribution vs. incentives

In this paper we explain the apparent "diversification discount” of conglomerates without assuming inefficient-cross subsidisation through internal capital markets. Instead we assume that internal capital market efficiently redistributes scare resources across a conglomerate’s divisions between sucessive production periods. The need for redistribution arises from the fact that resources may sometimes be produced by divisions which happen to be successful in an earlier production stage but which do not have the best investment opportunities in future production stages. In contrast to the existing literature we consider explicitly the incentive problem between corporate headquater and divisional managers using a standard Moral-Hazard framework. We show that although a complete incentive contract can be written bi-laterally between headquarter and divisional managers, the redistribution of resources across divisions creates additional agency costs in a conglomerate. Moreover, assuming that no complete contract can govern the interim redistribution policy by the headquarter, we show how the agency problem with divisional managers constrains headquarters interim redistribution to be ex ante inefficient.

Time for Stability in Derivatives Markets – a New Look at Central Counterparty Clearing for Securities Markets

The recent financial crisis has driven many plans for improving the stability and resilience of the global financial system. One concept, managing the risk of default in securities or financial derivatives markets through central counterparties, receives scrutiny in this report. The author examines the role centralized clearing parties could play in improving system resilience. These centralized clearing parties are institutions that interpose themselves between counterparties in financial transactions. The author offers a new look at what these institutions could achieve in over-the-counter derivatives trading and short-term funding markets. He places the emphasis on the core services they could provide: the diversification of counterparty risk and the redistribution of default losses among its members.Financial Services, derivatives, securities markets, central counterparty clearing

Do poorer countries have less capacity for redistribution ?

Development aid and policy discussions often assume that poorer countries have less internal capacity for redistribution in favor of their poorest citizens. The assumption is tested using data for 90 developing countries. The capacity for redistribution is measured by the marginal tax rate on those who are not poor by rich-country standards that is needed to cover the poverty gap or to provide a poverty-level of basic income, judged by developing-country standards. For most (but not all) countries with annual consumption per capita under $2,000 (at 2005 purchasing power parity) the required tax burdens are found to be prohibitive-often calling for marginal tax rates of 100 percent or more. By contrast, the required tax rates are quite low (1 percent on average) among all countries with consumption per capita over$4,000, as well as some poorer countries. Most countries fall into one of two groups: those with little or no realistic prospect of addressing extreme poverty through redistribution from the"rich"and those that would appear to have ample scope for such redistribution. Economic growth tends to move countries from the first group to the second. Thus the appropriate balance between growth and redistribution strategies can be seen to depend on the level economic development.Achieving Shared Growth,Rural Poverty Reduction,Population Policies,Debt Markets,Inequality

Government Intervention in the Markets for Education and Health Care: How and Why?

Education and health care are the two largest government expenditure items in the United States. The public sector directly provides the majority of educational services, through the public school bureaucracy, while most public support for health care is channelled through a system of tax-supported government payments for services provided by private providers. The contrast between public policies in these markets raises a host of questions about the scope of government in a mixed economy, and the structure of policies for market intervention. This paper examines how two standard arguments for government intervention in private markets, market failure and redistribution, apply to the markets for education and medical care. It then considers the 'choice of instrument' problem, the choice between intervention via price subsidies, mandates, and direct public provision of services in these markets. Economic arguments alone seem unable to explain the sharp divergence between the nature of public policies with respect to education and medical care. Moreover, there is virtually no evidence on the empirical magnitudes of many of the key parameters needed to guide policy in these areas, such as the social externalities associated with primary and secondary education or the degree to which adverse selection in the insurance market prevents private insurance purchase.

Fiscal redistribution and income inequality in Latin America

Income inequality in Latin America ranks among the highest in the world. It can be traced back to the unequal distribution of assets (especially land and education) in the region. But the extent to which asset inequality translates into income inequality depends on the redistributive capacity of the state. This paper documents the performance of Latin American fiscal systems from the perspective of income redistribution using newly-available information on the incidence of taxes and transfers across the region. The findings indicate that: (i) the differences in income inequality before taxes and transfers between Latin America and Western Europe are much more modest than those after taxes and transfers; (ii) the key reason is that, in contrast with industrial countries, in most Latin American countries the fiscal system is of little help in reducing income inequality; and (iii) in countries where fiscal redistribution is significant, it is achieved mostly through transfers rather than taxes. These facts stress the need for fiscal reforms across the region to further the goal of social equity. However, different countries need to place different relative emphasis on raising tax collection, restructuring the tax system, and improving the targeting of expenditures.Taxation&Subsidies,Emerging Markets,Debt Markets,Economic Theory&Research,Poverty Impact Evaluation

Market and non-market transfers of land in Ethiopia - implications for efficiency, equity, and non-farm development

The authors use data from Ethiopia to empirically assess determinants of participation in land rental markets, compare these to those of administrative land reallocation, and make inferences on the likely impact of households'expectations regarding future redistribution. Results indicate that rental markets outperform administrative reallocation in terms of efficiency and poverty. Households who have part-time jobs in the off-farm sector are significantly more likely to expect land to be taken away from them through administrative means. Eliminating the scope for administrative land reallocation may thus be a precondition for more vigorous development of the off-farm sector.Environmental Economics&Policies,Municipal Housing and Land,Banks&Banking Reform,Land Use and Policies,Real Estate Development,Environmental Economics&Policies,Banks&Banking Reform,Rural Land Policies for Poverty Reduction,Land Use and Policies,Municipal Housing and Land

Schooling, Inequality and Government Policy

This paper asks: What is the effect of government policy on output and inequality in an environment with education and labor-supply decisions? The answer is given in a general equilibrium model, consistent with the post 1960s facts on male wage inequality and labor supply in the U.S. In the model, education and labor-supply decisions depend on progressive income taxation, the education system, the social security system, and technology-driven wage differentials. Government policies affect output and inequality through two channels. First, a policy change leads to an asymmetric adjustment of working hours and savings of schooled and unschooled individuals. Second, there is a redistribution of the workforce between schooled and unschooled workers. Using a battery of proposed government policies, we demonstrate that skill redistribution dampens the response of wage inequality to a policy change and amplifies the response of output by an additional 1 to 2 percent.Labour markets; Potential output; Productivity