On Voters' Attitudes Towards Unemployment Insurance Subsidies across Regions: A Canadian Simulation

The Canadian unemployment insurance program is designed to reflect the varying risk of joblessness across regions. Regions that are considered low-risk areas subsidize higher risk ones. A region's risk is typically proxied by its relative unemployment rate. We use a dynamic, heterogeneous-agent model calibrated to Canada to analyze voters preferences between a uniformly generous unemployment insurance and the current system with asymmetric generosity. We find that Canada's unusual unemployment insurance system is surprisingly close to what voters would choose in spite of the possibilities of moral hazard and self-insurance through asset build-up.

Costly Revenue-Raising and the Case for Favoring Import-Competing Industries

A standard finding in the political economy of trade policy literature is that we should expect export-oriented industries to attract more assistance than import-competing industries. In reality, however, trade policy is heavily biased toward supporting import industries. This paper shows within a standard protection for sale framework, how the costliness of raising revenue via taxation makes trade subsidies less desirable and trade taxes more desirable. The model is then estimated and its predictions tested using U.S. tariff data. An empirical estimate of the costliness of revenue-raising is also obtained.

The Congressional Budget Process and the Aggregate Level of Spending

This paper analyzes whether the Congressional budget process (instituted in 1974) leads to lower aggregate spending than does the piece-meal appropriations process that preceded it. Previous theoretical analysis, using spatial models of legislator preferences, is inconclusive. This paper uses a model of interest group lobbying, where a legislature determines spending on a national public good and on subsidies to subsets of the population that belong to nationwide sector-specific interest groups. In the appropriations process, the Appropriations Committee proposes a budget, maximizing the joint welfare of voters and the interest groups, that leads to overspending on subsidies. In the budget process, a Budget Committee proposes an aggregate level of spending (the budget resolution); the Appropriations Committee then proposes a budget. If the lobby groups are not subject to a binding resource constraint, the two institutional structures lead to identical outcomes. With such a constraint, however, there is a free rider problem among the groups in lobbying the Budget Committee, as each group only obtains a small fraction of the benefits from increasing the aggregate budget. If the number of groups is sufficiently large, each takes the budget resolution as given, and lobbies only the Appropriations Committee. The main results are that aggregate spending is lower, and social welfare higher, under the budget process; however, provision of the public good is suboptimal. The paper also presents two extensions: the first endogenizes the enforcement of the budget resolution by incorporating the relevant procedural rules into the model. The second analyzes statutory budget rules that limit spending levels, but can be revised by a simple majority vote. In each case,the free rider problem prevents the groups from securing the required changes to procedural and budget rules.

Achieving Universal Primary Education: Can Kenya Afford it?

Kenya has experienced a rapid expansion of the education system partly due to high government expenditure on education. Despite the high level of expenditure on education, primary school enrolment has been declining since early 1990s and until 2003 when gross primary school enrolment increased to 104 percent after the introduction of free primary education. However, with an estimated net primary school enrolment rate of 77 percent, the country is far from achieving universal primary education. The worrying scenario is that the allocations of resources within the education sector seems to be ineffective as the increasing expenditure on education goes to recurrent expenditure (to pay teachers salaries). Kenya's Poverty Reduction Strategy Paper (PRSP) and the Economic Recovery Strategy for wealth and Employment Creation (ERS) outlines education targets of reaching universal primary education by 2015. The Government is faced with budget constrains and therefore the available resources need to be allocated efficiently in order to realize the education targets. The paper uses Budget Negotiation Framework (BNF) to analyze the cost effective ways of resource allocation in the primary education sector to achieve universal primary education and other education targets. Budget Negotiation Framework is a tool that aims at achieving equity and efficiency in resource allocation. Results from the analysis shows that universal primary education by the year 2015 is a feasible target for Kenya. The results also show that with a more cost- effective spending of education resources - increased trained teachers, enhanced textbook supplies and subsidies targeting the poor - the country could realize higher enrolment rates than what has been achieved with free primary education.

Contractual Difficulties in Environmental Management and the Protection of Biodiversity: The Case of Conservation and Mitigation Banking

This paper offers a principal-agent model of feasible private contracting in mitigation and conservation banking aimed at the protection of natural habitat and bio-diversity of US wetlands and uplands. It is shown that while it is straightforward to design an incentive contract, such a contract may not achieve the federally mandated objective of no net loss of habitat. This is because the minimum payment required as an economic incentive to private agents may be greater than what they should receive for the habitat values that they actually created in the field. This possible problem is shown to derive from nonconvexity in the production possibility set between the biological value of land as natural habitat and in non-habitat uses such as in urban development. The paper concludes with a consideration of several institutional devises that may promote the convergence of private contracting and the attainment of no net loss. These include the payment of subsidies, greater accuracy in the identification of actual quality by the principal, and the use of several incentive alignment devises.

Nonpoint Pollution Control: Inducing First-best Outcomes through the Use of Threats

In this paper we develop a simple economic model to analyze the use of a policy that combines a voluntary approach to controlling nonpoint-source pollution with a background threat of an ambient tax if the voluntary approach is unsuccessful in meeting a pre-specified environmental goal. We first consider the case where the policy is applied to a single farmer, and then extend the analysis to the case where the policy is applied to a group of farmers. We show that in either case such a policy can induce cost-minimizing abatement without the need for farm-specific information. In this sense, the combined policy approach is not only more effective in protecting environmental quality than a pure voluntary approach (which does not ensure that water quality goals are met) but also less costly than a pure ambient tax approach (since it entails lower information costs). However, when the policy is applied to a group of farmers, we show that there is a potential tradeoff in the design of the policy. In this context, lowering the cutoff level of pollution used for determining total tax payments increases the likely effectiveness of the combined approach but also increases the potential for free riding. By setting the cutoff level equal to the target level of pollution, the regulator can eliminate free riding and ensure that cost-minimizing abatement is the unique Nash equilibrium under which the target is met voluntarily. However, this cutoff level also ensures that zero voluntary abatement is a Nash equilibrium. In addition, with this cutoff level the equilibrium under which the target is met voluntarily will not strictly dominate the equilibrium under which it is not. We show that all results still hold if the background threat instead takes the form of reducing government subsidies if a pre-specified environmental goal is not met.