The Relative Efficiency of Automatic and Discretionary Industrial Aid

For the last two decades, the primary instruments for UK regional policy have been discretionary subsidies. Such aid is targeted at “additional” projects - projects that would not have been implemented without the subsidy - and the subsidy should be the minimum necessary for the project to proceed. Discretionary subsidies are thought to be more efficient than automatic subsidies, where many of the aided projects are non-additional and all projects receive the same subsidy rate. The present paper builds on Swales (1995) and Wren (2007a) to compare three subsidy schemes: an automatic scheme and two types of discretionary scheme, one with accurate appraisal and the other with appraisal error. These schemes are assessed on their expected welfare impacts. The particular focus is the reduction in welfare gain imposed by the interaction of appraisal error and the requirements for accountability. This is substantial and difficult to detect with conventional evaluation techniques.

Avoidance Policies – A New Conceptual Framework

This paper develops a general theoretical framework within which a heterogeneous group taxpayers confront a market that supplies a variety of schemes for reducing tax liability, and uses this framework to explore the impact of a wide range of anti-avoidance policies. Schemes differ in their legal effectiveness and hence in the risks to which they expose taxpayers - risks which go beyond the risk of audit considered in the conventional literature on evasion. Given the individual taxpayer’s circumstances, the prices charged for the schemes and the policy environment, the model predicts (i) whether or not any given taxpayer will acquire a scheme, and (ii) if they do so, which type of scheme they will acquire. The paper then analyses how these decisions, and hence the tax gap, are influenced by four generic types of policy: Disclosure – earlier information leading to faster closure of loopholes; Penalties – introduction of penalties for failed avoidance; Policy Design – fundamental policy changes that design out opportunities for avoidance; Product Register - the introduction of GAARs or mini-GAARs that give greater clarity about how different types of scheme will be treated. The paper shows that when considering the indirect/behavioural effects of policies on the tax gap it is important to recognise that these operate on two different margins. First policies will have deterrence effects – their impact on the quantum of taxpayers choosing to acquire different types schemes as distinct to acquiring no scheme at all. There will be a range of such deterrence effects reflecting the range of schemes available in the market. But secondly, since different schemes generate different tax gaps, policies will also have switching effects as they induce taxpayers who previously acquired one type of scheme to acquire another. The first three types of policy generate positive deterrence effects but differ in the switching effects they produce. The fourth type of policy produces mixed deterrence effects.

Changing Eating Habits - A Field Experiment in Primary Schools

We conduct a field experiment in 31 primary schools in England to test whether incentives to eat fruit and vegetables help children develop healthier habits. The intervention consists of rewarding children with stickers and little gifts for a period of four weeks for choosing a portion of fruit and vegetables at lunch. We compare the effects of two incentive schemes (competition and piece rate) on choices and consumption over the course of the intervention as well as once the incentives are removed and six months later. We find that the intervention had positive effects, but the effects vary substantially according to age and gender. However, we find little evidence of sustained long term effects, except for the children from poorer socio‐economic backgrounds.

Monetary Policy Delegation and Equilibrium Coordination

This paper revisits the argument that the stabilisation bias that arises under discretionary monetary policy can be reduced if policy is delegated to a policymaker with redesigned objectives. We study four delegation schemes: price level targeting, interest rate smoothing, speed limits and straight conservatism. These can all increase social welfare in models with a unique discretionary equilibrium. We investigate how these schemes perform in a model with capital accumulation where uniqueness does not necessarily apply. We discuss how multiplicity arises and demonstrate that no delegation scheme is able to eliminate all potential bad equilibria. Price level targeting has two interesting features. It can create a new equilibrium that is welfare dominated, but it can also alter equilibrium stability properties and make coordination on the best equilibrium more likely.

The Impact of Information Provision on Agglomeration Bonus Performance: An Experimental Study on Local Networks

The Agglomeration Bonus (AB) is a mechanism to induce adjacent landowners to spatially coordinate their land use for the delivery of ecosystem services from farmland. This paper uses laboratory experiments to explore the performance of the AB in achieving the socially optimal land management configuration in a local network environment where the information available to subjects varies. The AB poses a coordination problem between two Nash equilibria: a Pareto dominant and a risk dominant equilibrium. The experiments indicate that if subjects are informed about both their direct and indirect neighbors’ actions, they are more likely to coordinate on the Pareto dominant equilibrium relative to the case where subjects have information about their direct neighbors’ action only. However, the extra information can only delay – and not prevent – the transition to the socially inferior risk dominant Nash equilibrium. In the long run, the AB mechanism may only be partially effective in enhancing delivery of ecosystem services on farming landscapes featuring local networks.

Social norms, morals and self-interest as determinants of pro-environment behaviour.

This paper considers the role which selfish, moral and social incentives and pressures play in explaining the extent to which stated choices over pro-environment behaviours vary across individuals. The empirical context is choices over household waste contracts and recycling actions in Poland. A theoretical model is used to show how cost-based motives and the desire for a positive self- and social image combine to determine the utility from alternative choices of recycling behaviour. We then describe a discrete choice experiment designed to empirically investigate the effects such drivers have on stated choices. Using a latent class model, we distinguish three types of individual who are described as duty-orientated recyclers, budget recyclers and homo oeconomicus. These groups vary in their preferences for how frequently waste is collected, and the number of categories into which household waste must be recycled. Our results have implications for the design of future policies aimed at improving participation in recycling schemes.

An Empirical Assessment of Optimal Monetary Policy Delegation in the Euro Area

We estimate a New Keynesian DSGE model for the Euro area under alternative descriptions of monetary policy (discretion, commitment or a simple rule) after allowing for Markov switching in policy maker preferences and shock volatilities. This reveals that there have been several changes in Euro area policy making, with a strengthening of the anti-inflation stance in the early years of the ERM, which was then lost around the time of German reunification and only recovered following the turnoil in the ERM in 1992. The ECB does not appear to have been as conservative as aggregate Euro-area policy was under Bundesbank leadership, and its response to the financial crisis has been muted. The estimates also suggest that the most appropriate description of policy is that of discretion, with no evidence of commitment in the Euro-area. As a result although both ‘good luck’ and ‘good policy’ played a role in the moderation of inflation and output volatility in the Euro-area, the welfare gains would have been substantially higher had policy makers been able to commit. We consider a range of delegation schemes as devices to improve upon the discretionary outcome, and conclude that price level targeting would have achieved welfare levels close to those attained under commitment, even after accounting for the existence of the Zero Lower Bound on nominal interest rates.

An Empirical Assessment of Optimal Monetary Policy Delegation in the Euro Area

We estimate a New Keynesian DSGE model for the Euro area under alternative descriptions of monetary policy (discretion, commitment or a simple rule) after allowing for Markov switching in policy maker preferences and shock volatilities. This reveals that there have been several changes in Euro area policy making, with a strengthening of the anti-inflation stance in the early years of the ERM, which was then lost around the time of German reunification and only recovered following the turnoil in the ERM in 1992. The ECB does not appear to have been as conservative as aggregate Euro-area policy was under Bundesbank leadership, and its response to the financial crisis has been muted. The estimates also suggest that the most appropriate description of policy is that of discretion, with no evidence of commitment in the Euro-area. As a result although both ‘good luck’ and ‘good policy’ played a role in the moderation of inflation and output volatility in the Euro-area, the welfare gains would have been substantially higher had policy makers been able to commit. We consider a range of delegation schemes as devices to improve upon the discretionary outcome, and conclude that price level targeting would have achieved welfare levels close to those attained under commitment, even after accounting for the existence of the Zero Lower Bound on nominal interest rates.