Subsidies as Optimal Fiscal Stimuli

In the theoretical macroeconomics literature, fiscal policy is almost uniformly taken to mean taxing and spending by a ‘benevolent government’ that exploits the potential aggregate demand externalities inherent in the imperfectly competitive nature of goods markets. Whilst shown to raise aggregate output and employment, these policies crowd-out private consumption and hence typically reduce welfare. In this paper we consider the use of ‘tax-and-subsidise’ instead of ‘taxand- spend’ policies on account of their widespread use by governments, even in the recent recession, to stimulate economic activity. Within a static general equilibrium macro-model with imperfectly competitive good markets we examine the effect of wage and output subsidies and show that, for a small open economy, positive tax and subsidy rates exist which maximise welfare, rendering no intervention as a suboptimal state. We also show that, within a two-country setting, a Nash non-cooperative symmetric equilibrium with positive tax and subsidy rates exists, and that cooperation between trading partners in setting these rates is more expansionary and leads to an improvement upon the non-cooperative solution.

Patent policy, patent pools, and the accumulation of claims in sequential innovation

We present a dynamic model where the accumulation of patents generates an increasing number of claims on sequential innovation. We compare innovation activity under three regimes -patents, no-patents, and patent pools- and find that none of them can reach the first best. We find that the first best can be reached through a decentralized tax-subsidy mechanism, by which innovators receive a subsidy when they innovate, and are taxed with subsequent innovations. This finding implies that optimal transfers work in the exact opposite way as traditional patents. Finally, we consider patents of finite duration and determine the optimal patent length.

Sunk costs, extensive R&D subsidies and permanent inducement effects

We study whether there is scope for using subsidies to smooth out barriers to R&D performance and expand the share of R&D firms in Spain. We consider a dynamic model with sunk entry costs in which firms’ optimal participation strategy is defined in terms of two subsidy thresholds that characterise entry and continuation. We compute the subsidy thresholds from the estimates of a dynamic panel data type-2 tobit model for an unbalanced panel of about 2,000 Spanish manufacturing firms. The results suggest that “extensive” subsidies are a feasible and efficient tool for expanding the share of R&D firms.

Direct and indirect subsidies in markets with system goods in the presence of externalities. Preliminary version

This paper derives a model of markets with system goods and two technological standards. An established standard incurs lower unit production costs but causes a negative externality. The paper derives the conditions for policy intervention and compares the effect of direct and indirect cost-reducing subsidies in two markets with system goods in the presence of externalities. If consumers are committed to the technology by purchasing one of the components, direct subsidies are preferable. For a medium-low cost difference between technological standards and a low externality cost it is optimal to provide a direct subsidy only to the first technology adopter. As the higher the externality cost raises, the more technology adopters should be provided with direct subsidies. This effect is robust in all extensions. In the absence of consumers commitment to a technological standard indirect and direct subsidies are both desirable. In this case, the subsidy to the first adopter is lower then the subsidy to the second adopter. Moreover, for the low cost difference between technological standards and low externality cost the fi rst fi rm chooses a superior standard without policy intervention. Finally, a perfect compatibility between components based on different technological standards enhances an advantage of indirect subsidies for medium-high externality cost and cost difference between technological standards. Journal of Economic Literature Classi fication Numbers: C72, D21, D40, H23, L13, L22, L51, O25, O33, O38. Keywords: Technological standards; complementary products; externalities; cost-reducing subsidies; compatibility.

Farm-Level Analysis of Risk Management Proposals, March 2000

This paper presents a detailed report of the representative farm analysis (summarized in FAPRI Policy Working Paper #01-00). At the request of several members of the Committee on Agriculture, Nutrition, and Forestry of the U.S. Senate, we have continued to analyze the impacts of the Farmers’ Risk Management Act of 1999 (S. 1666) and the Risk Management for the 21st Century Act (S. 1580). Earlier analysis reported in FAPRI Policy Working Paper #04-99 concentrated on the aggregate net farm income and government outlay impacts. The representative farm analysis is conducted for several types of farms, including both irrigated and non-irrigated cotton farms in Tom Green County, Texas; dryland wheat farms in Morton County, North Dakota and Sumner County, Kansas; and a corn farm in Webster County, Iowa. We consider additional factors that may shed light on the differential impacts of the two plans. 1. Farm-level income impacts under alternative weather scenarios. 2. Additional indirect impacts, such as a change in ability to obtain financing. 3. Implications of within-year price shocks. Our results indicate that farmers who buy crop insurance will increase their coverage levels under S. 1580. Farmers with high yield risk find that the 65 percent coverage level maximizes expected returns, but some who feel that they obtain other benefits from higher coverage will find that the S. 1580 subsidy schedule significantly lowers the cost of obtaining the additional coverage. Farmers with lower yield risk find that the increased indemnities from additional coverage will more than offset the increase in producer premium. In addition, because S. 1580 extends its increased premium subsidy percentages to revenue insurance products, farmers will have an increased incentive to buy revenue insurance. Differences in the ancillary benefits from crop insurance under the baseline and S. 1580 would be driven by the increase in insurance participation and buy-up. Given the same levels of insurance participation and buy-up, the ancillary benefits under the two scenarios would be the same.

Prime Property Institutions for a Subprime Era: Exploring Innovative Models of Residential Development and Finance

This paper breaks new ground toward contractual and institutional innovation in models of homeownership, equity building, and mortgage enforcement. Inspired by recent developments in the affordable housing sector and in other types of public financing schemes, this paper suggests extending institutional and financial strategies such as timeand place-based division of property rights, conditional subsidies, and credit mediation to alleviate the systemic risks of mortgage foreclosure. Alongside a for-profit shared equity scheme that would be led by local governments, we also outline a private market shared equity model, one of bootstrapping home buying with purchase options.

Economies of Feedlot Scale, Biosecurity, Investment, and Endemic Livestock Disease, September 2006

Infectious livestock disease creates externalities for proximate animal production enterprises. The distribution of production scale within a region should influence and be influenced by these disease externalities. Taking the distribution of the unit costs of stocking an animal as primitive, we show that an increase in the variance of these unit costs reduces consumer surplus. The effect on producer surplus, total surplus, and animal concentration across feedlots depends on the demand elasticity. A subsidy to smaller herds can reduce social welfare and immiserize the farm sector by increasing the extent of disease. While Nash behavior involves excessive stocking, disease effects can be such that aggregate output declines relative to first-best. Disease externalities can induce more adoption of a cost-reducing technology by larger herds so that animals become more concentrated across herds. For strategic reasons, excess overall adoption of the innovation may occur. Larger herds are also more likely to adopt biosecurity innovations, explaining why larger herds may be less diseased in equilibrium.

Midwest Regional Rail Passenger Initiative Status Report December 2006

This report is submitted as required per Code of Iowa section 327J.3(5), "The director shall report annually to the general assembly concerning the development and operation of the midwest regional rail system and the state's passenger rail service." The Midwest Regional Rail Initiative (MWRRI) is a nine-state effort to develop an implementation plan for a 3,000-mile, high-speed rail system hubbed in Chicago. Studies done since 1996 have concluded that such a regional system, including a line from Chicago to Omaha through Davenport, Iowa City and Des Moines, is viable. Most of the system would be upgraded to allow 110 mile-per-hour service. Some low volume lines, including the Iowa portions, would be upgraded for 79 mile-per-hour service. The nine-state coalition released an updated 2004 executive report for the system. As reported, the updated cost estimate for the Chicago to Omaha corridor, which includes a branch to Quincy, Ill., is $638 million for infrastructure and $167 million for rolling stock. These costs are higher than first estimated in 1998 and are given in 2002 dollars, (not adjusted for the cost of inflation). Operating subsidies would be required during an extended start-up phase. The allocation of these subsidy costs among the various states has not been determined, and is still a subject for analysis and negotiation. Little progress on implementation is expected unless a federal funding package is passed for passenger rail initiatives. Continued congressional discussion on policy directions relative to Amtrak clouds the issue of passenger rail funding. However, Congress is expected to address passenger rail issues and funding in 2007. Participation of the Iowa Department of Transportation in the MWRRI is authorized under Iowa Code section 327J.3.

Targeting fertility and female participation through the income tax

We evaluate the effect of a 2003 reform in the Spanish income tax on fertility and the employment of mothers with small children. The reform introduced a tax credit for working mothers with children under the age of three, while also increasing child deductions for all households with children. Theoretically, given the interplay of these two components, the expected effect of the reform is ambiguous on both outcomes. We find that the combined reforms significantly increased both fertility (by almost five percent) and the employment rate of mothers with children under three (by two percent). These effects were more pronounced among less-educated women. In addition, to disentangle the impact of the two reform components, we use an earlier reform that increased child deductions in 1999. We find that the child deductions affect mothers employment negatively, which implies that the 2003 tax credit would have increased employment even more (up to five percent) in the absence of the change in child deductions.

The impact of interest-rate subsidies on long-term household debt: Evidence from a large program

The responsiveness of long-term household debt to the interest rate is acrucial parameter for assessing the effectiveness of public policies aimedat promoting specific types of saving. This paper estimates the effect ofa reform of Credito Bonificado, a large program in Portugal that subsidizedmortgage interest rates, on long-term household debt. The reform establisheda ceiling in the price of the house that could be financed through theprogram, and provides plausibly exogenous variation in incentives. Usinga unique dataset of matched household survey data and administrative recordsof debt, we document a large decrease in the probability of signing a newloan after the removal of the subsidy.

Prime property institutions for a subprime era: Toward innovative models of homeownership

This Article breaks new ground toward contractual and institutional innovation in models of homeownership, equity building, and mortgage enforcement. Inspired by recent developments in the affordable housing sector and other types of public financing schemes, we suggest extending institutional and financial strategies such as time- and place-based division of property rights, conditional subsidies, and credit mediation to alleviate the systemic risks of mortgage foreclosure. Two new solutions offer a broad theoretical basis for such developments in the economic and legal institution of homeownership: a for-profit shared equity scheme led by local governments alongside a private market shared equity model, one of "bootstrapping home buying with purchase options".

Research joint ventures and optimal R&D policy with asymmetric information

When to allow Research Joint Ventures (RJVs) or not is an importantinstrument in the development of an optimal R&D policy. Theregulator, however, is unlikely to know all the relevant informationto regulate R&D optimally. The extent to which there existappropriability problems between the firms is one such variable thatis private information to the firms in the industry. In a duopolysetting we analyze the characteristics of a second-best R&D policywhere the government can either allow RJVs or not and give lump-sumsubsidies to the parties involved. The second-best R&D policy withoutsubsidies will either block some welfare improving RJVs or allow somewelfare reducing ones. With lump-sum subsidies, the second-best policytrades off the expected subsidy cost with allowing welfare decreasingRJVs or blocking welfare increasing ones.

Evaluating the impact of public subsidies on a firm's performance: a quasi-experimental approach

Many regional governments in developed countries design programs to improve the competitiveness of local firms. In this paper, we evaluate the effectiveness of public programs whose aim is to enhance the performance of firms located in Catalonia (Spain). We compare the performance of publicly subsidised companies (treated) with that of similar, but unsubsidised companies (non-treated). We use the Propensity Score Matching (PSM) methodology to construct a control group which, with respect to its observable characteristics, is as similar as possible to the treated group, and that allows us to identify firms which retain the same propensity to receive public subsidies. Once a valid comparison group has been established, we compare the respective performance of each firm. As a result, we find that recipient firms, on average, change their business practices, improve their performance, and increase their value added as a direct result of public subsidy programs.

Evaluating the impact of public subsidies on a firm's performance: a quasi-experimental approach

Many regional governments in developed countries design programs to improve the competitiveness of local firms. In this paper, we evaluate the effectiveness of public programs whose aim is to enhance the performance of firms located in Catalonia (Spain). We compare the performance of publicly subsidised companies (treated) with that of similar, but unsubsidised companies (non-treated). We use the Propensity Score Matching (PSM) methodology to construct a control group which, with respect to its observable characteristics, is as similar as possible to the treated group, and that allows us to identify firms which retain the same propensity to receive public subsidies. Once a valid comparison group has been established, we compare the respective performance of each firm. As a result, we find that recipient firms, on average, change their business practices, improve their performance, and increase their value added as a direct result of public subsidy programs.

Forgoing dental care for economic reasons in Switzerland: a six-year cross-sectional population-based study

BACKGROUND: While oral health is part of general health and well-being, oral health disparities nevertheless persist. Potential mechanisms include socioeconomic factors that may influence access to dental care in the absence of universal dental care insurance coverage. We investigated the evolution, prevalence and determinants (including socioeconomic) of forgoing of dental care for economic reasons in a Swiss region, over the course of six years. METHODS: Repeated population-based surveys (2007-2012) of a representative sample of the adult population of the Canton of Geneva, Switzerland. Forgone dental care, socioeconomic and insurance status, marital status, and presence of dependent children were assessed using standardized methods. RESULTS: A total of 4313 subjects were included, 10.6% (457/4313) of whom reported having forgone dental care for economic reasons in the previous 12 months. The crude percentage varied from 2.4% in the wealthiest group (monthly income ≥ 13,000 CHF, 1 CHF ≈ 1$) to 23.5% among participants with the lowest income (<3,000 CHF). Since 2007/8, forgoing dental care remained stable overall, but in subjects with a monthly income of <3,000 CHF, the adjusted percentage increased from 16.3% in 2007/8 to 20.6% in 2012 (P trend = 0.002). Forgoing dental care for economic reasons was independently associated with lower income, younger age, female gender, current smoking, having dependent children, divorced status and not living with a partner, not having a supplementary health insurance, and receipt of a health insurance premium cost-subsidy. CONCLUSIONS: In a Swiss region without universal dental care insurance coverage, prevalence of forgoing dental care for economic reasons was high and highly dependent on income. Efforts should be made to prevent high-risk populations from forgoing dental care.