ECON 4921: Lecture 12. Jon Fiva, 2009

Transcription

1 ECON 4921: Lecture 12 Jon Fva, 2009

2 Roadmap 1. Introducton 2. Insttutons and Economc Performance 3. The Frm 4. Organzed Interest and Ownershp 5. Complementarty of Insttutons 6. Insttutons and Commtment 7. Agency problems: Voters Poltcans Bureaucrats 8. Fscal Federalsm 9. System Competton

3 Redstrbuton An mportant role of government s to redstrbute ncome. (Why?) Tradtonal publc fnance argues that the central level of government should be responsble for redstrbuton. E.g. redstrbuton s ntrnscally a natonal polcy (Stgler, 1957 p. 217) Man worry: moblty of households

4 Mgraton externalty Households vote wth ther feet. Governments have ncentves to set fscal varables to nfluence the locaton of households (and frms). avod becomng welfare magnets. In equlbrum all local governments set lower benefts than they would n a hypothetcal no mobltyworld. Extreme case: race to the bottom More reasonable: Underprovson (as n Wldasn,1991, Wheaton 2000).

5 The model I local governments, ndexed from = 1,, I. Common labor market Two knds of households, rch and poor, overall szes fxed. Poor household endowed wth 1 unt of labor perfectly moble across local governments no mgraton costs. Rch households endowed wth other factors of producton mmoble care for the poor

6 The model Each ursdcton produces a numerare good wth labor from the poor, l. ' '' Producton technology f ( l ), f ( l ) >0, ( ) f l <0 ' Compettve labor market: w = f ( l ) ' Rch households earn the remanng ncome ( ) ( ) y = f l f l l.

7 Redstrbuton The rch have altrustc preferences: u( y, z ) where z = w + b Each poor household ( welfare clent ) receve b (smlar for all poor) bl n Each rch household ( tax payer ) pays (smlar for all rch) n s the number of rch households n the ursdcton

8 Mgraton equlbrum z must be equal across all (why?) ' ( ) ( ) f l b f l b, + = +. (1) ' Common labor market ensures that wages equlbrate mgraton flows. Let L denote the total number of poor households n the economy, then: I l = L. (2) = 1 Equaton (1) and (2) determne the dstrbuton of welfare clents across ursdctons and ther common net ncome, z, condtonal on b, =1,, I.

9 Mgraton equlbrum Dfferentatng (2) wth respect to b yelds I l = 0, (3) b = 1 and dfferentatng (1) wth respect to b yelds z '' l = f ( l) + 1, for = b b z '' l = f ( l), for b b, (4)

10 Mgraton equlbrum Rearrangng l z 1 1 =,for = b b f l f l '' '' '' ( ) ( ) l z 1 =, for b b f l ( ), (5) Substtutng ths nto (3) to solve for z as a functon of the parameters b b yelds (,..., ) 1 I z = σ > 0 b, (6) where σ = f '' 1 1 /. I ( l) '' f ( l) = 1 [ 0,1] σ. When welfare clents are evenly dstrbuted across all local 1 governments then σ =. I

11 Mgraton equlbrum And (5) can be wrtten: l σ 1 = > 0,for = b f l '' ( ) l σ = < 0, for b f l '' ( ). (7) When b ncreases: ursdcton s more attractve and poor households mgrate from other ursdctons nto ursdcton. Wthout the common labor market whch ntroduces offsettng wage movements, then all the poor would move to the ursdcton wth the hghest benefts.

12 Choce of beneft levels Decson taken by representatve rch household Each rch household receves 1/n of total non poor ncome ' ( ) ( ) f l f l l bl ' u( y, z) = u, f ( l) + b n n. (8) Each ursdcton maxmzes u( y, z ) wrt b, takng nto account the mgraton effect n (7) and vewng other ursdctons beneft levels as fxed. (, ) MRS y z y / b z / b =. (9)

13 Choce of beneft levels Assumng a symmetrc equlbrum (6) and (7) can be wrtten as: z b 1 = I y = b( 1) '' l b n f ( l) I I (10) b( I 1) and the FOC: n MRS( y, z) = l. (11) '' f ( l ) RHS of (11): prvate margnal socal cost to taxpayers n ursdcton. Underprovson of welfare benefts To see why: consder FOC from no moblty case: (, ) n MRS y z l =. (12)

14 Margnal cost of redstrbuton MC of redstrbuton s larger n the moblty case than n the nomoblty case Intuton: the representatve tax payer s compares altrustc gans from helpng the poor to an ncrease n the tax burden. If the poor do not move, then the tax burden rses only because each of a fxed number of poor recpents receves a larger beneft. When welfare mgraton occurs, the sze of the ursdcton s poor populaton grows as ts welfare beneft becomes more generous.

15 Zero sum game Concerns about welfare mgraton depress welfare benefts n all ursdctons. No ursdcton succeeds n repellng welfare clents All ursdctons set lower benefts than they would n the nomoblty case. The welfare benefts are therefore too low seen from the socety s pont of vew.

16 The case for centralzaton Decentralzatoned responsblty for redstrbuton each ursdcton to choose ts polcy n solaton, gnorng the postve external benefts t creates for other ursdctons. When a ursdcton ncreases ts welfare benefts, t attracts moble low ncome households, mplctly reducng other ursdctons redstrbutve burdens. Ths s only one part of the story. In a rcher model: response of the rch may amplfy the mgraton externalty by movng out of the ursdcton.