Comparing the distortionary effects of alternative in-kind intergovernmental transfers

This paper compares the distortions associated with alternative inter-governmental allocation rules when a central authority provides inputs for the provision of social services by local governments, and when local governments differ in their needs. Under a quantity-based mechanism, the input choices of high-need localities will tend to be distorted downwards. In order to convince the center of their higher needs, these communities signal their status by spending too little. However, under an expenditure-based mechanism the direction of distortion of the input choices of high-need localities depends on the price elasticity of demand for the local input. When demand is inelastic (elastic), in order to signal their high needs, high-need localities spend too much (little) on local inputs.Inter-governmental transfers, matching grants

The Organization of Public Service Provision

This paper addresses the question of how the responsibility for the delivery of social services, including health, education, and welfare programs, should be divided between state and central governments. We combine a random voting model and the incomplete contracts paradigm to formalize the trade off between central and state responsibility for service delivery, and find that authority should rest with the party for whom the marginal impact of the service on re-election chances is greater. This in turn means that, other things equal, states with lower than average health, education, or welfare status should be given responsibility for service delivery, while authority in states with above average indicators should reside with the central government. Also, we show that there is no presumption that states that are given authority for service delivery should necessarily be granted expanded tax authority.public service provision, political economy, random voting, incomplete contracts

Poverty Reduction Using Self-Interested Intermediaries: Implications for the Design of Inter-Governmental Transfers

The paper studies the design of inter-governmental transfers when redistribution is effected through the public provision of a private good (education) by local government agents. The central government does not necessarily have the same preferences as the local agents regarding the relative welfare of poor and non-poor individuals, but must rely on them to implement public spending decisions. This divergence of preferences induces an incentive role, which does not rely on the existence of externalities, for matching grants that take the form of two-part tariffs. Numerical simulations are used to investigate the dependence of the matching grant on the relationship between central and local preferences, local poverty rates, and the use of poverty maps.decentralization, poverty aleviation, inter-governmental grants

Purchasing Health Care Services from Providers with Unknown Altruism

Cost-sharing rules for paying physicians have been advanced as a way of generating incentives for the provision of quality care while recognizing their potential negative effects on production efficiency. However, the optimal sharing rate typically depends on the degree to which the physician acts in the interest of the patient, what we identify as the physician's altruism. Since the degree of altruism is likely to vary across physicians, and to be private information, the standard rules for setting the cost-sharing rate are unlikely to be optimal. This paper derives conditions for the optimal non-linear cost-sharing mechanism in the presence of asymmetric information about altruism, and shows how it can sometimes be implemented through a menu of linear cost-sharing schemes. The model can be used to rationalize the way some specialist physicians are paid in Australian hospitals.physician incentives, cost-sharing, altruism

Redistributing to the sick: How should health expenditures be integrated into the tax system?

I study the optimal joint taxation of income and health expenditures in a model in which individuals face idiosyncratic prices for leisure and health. First-best redistribution based on potential wage rates and health status is not feasible. Within a class of quasi-linear schedules, the conditions for an optimal tax/subsidy system depend on the own and cross price compensated elasticities of demand for leisure and health in a way that generalizes the standard results from the optimal linear income tax literature. Numerical simulations are employed to illustrate the sensitivity of tax and subsidy rates to the correlation between health status and wages. In these simulations, the effective marginal income tax rate optimally increases with health expenditures. However, the welfare gain from optimally incorporating health expenditures into the tax system appears to be very limited, compared with the effect of properly designing the income tax itself.Optimal taxation, health subsidies, redistribution

Financing Pharmaceutical Innovation: When Should Poor Countries Contribute?

We use a public economics framework to consider how pharmaceuticals should be priced when at least some of the R&D incentive comes from sales revenues. We employ familiar techniques of public finance to adjust standard pricing prescriptions in the context of global diseases, in which distributional inequities are extreme. With these adjustments, poor countries should not necessarily cover even their own marginal costs, and the pricing structure is not related to that which would be chosen by a monopolist in a simple way. We use this framework to examine on-going debates regarding the international patent system as embodied in the WTO's TRIPS agreement.Pharmaceutical pricing, Ramsey pricing, TRIPS

Long-Term Stability of Planets in the Alpha Centauri System

The alpha Centauri system is billions of years old, so planets are only expected to be found in regions where their orbits are long-lived. We evaluate the extent of the regions within the alpha Centauri AB star system where small planets are able to orbit for billion-year timescales, and we map the positions in the sky plane where planets on stable orbits about either stellar component may appear. We confirm the qualitative results of Wiegert & Holman (Astron. J. 113, 1445, 1997) regarding the approximate size of the regions of stable orbits of a single planet, which are larger for retrograde orbits relative to the binary than for pro-grade orbits. Additionally, we find that mean motion resonances with the binary orbit leave an imprint on the limits of orbital stability, and the effects of the Lidov-Kozai mechanism are also readily apparent. Overall, orbits of a single planet in the habitable zones near the plane of the binary are stable, whereas high-inclination orbits are short-lived. However, even well within regions where single planets are stable, multiple planet systems must be significantly more widely-spaced than they need to be around an isolated star in order to be long-lived