We formulate a model to explain why the lack of political competition may stifle economic performance and use the United States as a testing ground for the model’s predictions, exploiting the 1965 Voting Rights Act which helped break the near monpoly on political power of the Democrats in southern states. We find statistically robust evidence that changes in political competition have quantitatively important effects on state income growth, state policies, and quality of Governors. By our bottom-line estimate, the increase in political competition triggered by the Voting Rights Act raised long-run per capita income in the average affected state by about 20 percent.

The hallmark of the recent development and growth literature is a quest to identify institutions that explain a significant portion of the observed differences in living standards across countries. Empirical work in the area focuses almost exclusively on either the global sample or on developing nations. Certainly it is important to know which institutions are lacking in these developing countries, but the analysis provides little evidence for us to know to what extend a common set of institutions actually matters in advanced and developing countries. In this paper we examine parameter heterogeneity in prominent approaches to institutions and economic performance. We find that a new set of instruments is necessary to control for endogeneity, but that a common set of economically important institutions does indeed exist among advanced and developing nations. The impact of these institutions does vary substantially across samples; it is about three times as high in developing countries as compared to OECD countries.

The article advances the hypothesis that Germany is unable to increase its gains from trade despite increasing trading volumes. High and rigid German wages argely result from the minimum wage constraint imposed by a welfare state that offers generous replacement incomes. Confronted by low-wage competition from post-communist countries, Germany overspecializes in capital intensive goods, which creates a pathological export boom in terms of added value produced in exports. In addition, the country overspecializes in downstream activities, which implies that export quantities grow faster than value added. The reasons which induce extremely high exports are the same as those which cause unemployment to rise and the economy to stagnate.

Using simple benchmark models, this paper gives an introductory analysis of three separate policy issues that relate to the taxation of multinational firms: (i) the spread of tax measures that provide discriminatory tax relief to multinational firms; (ii) the switch from the current separate accounting system to a consolidated corporate tax base with formula apportionment; (iii) the introduction of a minimum statutory corporate tax rate in a geographically restricted area. Prior to these analyses, we briefly survey some of the empirical evidence on both the general development of corporate taxation in Europe and the OECD, and on the tax preferences granted to multinational firms.

Gual, Jordi; Hellwig, Martin F.; Perrot, Anne; Polo, Michele; Rey, Patrick; Schmidt, Klaus M. und Stenbacka, Rune (Dezember 2005): An Economic Approach to Article 82. Report by the European Advisory Group on Competition Policy. Münchener Wirtschaftswissenschaftliche Beiträge (VWL) 2005-26

This paper investigates the impact of emigration on the political choice regarding the size of the welfare state. Mobility has two countervailing effects: the political participation effect and the tax base effect. With emigration, the composition of the constituency changes. This increases the political influence of the less mobile part of the population. The new political majority has to take into account that emigration reduces tax revenues and thereby affects the feasible set of redistribution policies. The interaction of the two e¤ects has so far not been analyzed in isolation. We find that the direction of the total e¤ect of migration depends on the initial income distribution in the economy. Our results also contribute to the empirical debate on the validity of the median-voter approach for explaining the relation between income inequality and redistribution levels.

We analyze a sequential game between two symmetric countries when

firms can invest in a multinational structure that confers tax

savings. Governments are able to commit to long-run tax

discrimination policies before firms' decisions are made and

before statutory capital tax rates are chosen non-cooperatively.

Whether a coordinated reduction in the tax preferences granted to

mobile firms is beneficial or harmful for the competing countries

depends critically on the elasticity with which the firms'

organizational structure responds to tax discrimination

incentives. The model can be applied to recent policy initiatives

that aim at a ban on preferential tax regimes and at reducing the

profit shifting opportunities for multinational firms.

In many countries, governments involve interest groups at early stages of political decisionmaking. The idea of this is to enhance the legitimacy of the policy decision and to curb later opposition to the implementation of the policy. We show that the way and timing of interest groups involvement can be crucial for the scope and success of policy reforms. When interest groups influence both the policy choice, or legislation, and the subsequent decision on the implementation of the policy, their early involvement may lead them to oppose the reform more than if they had been excluded from the legislation stage.

We show experimentally that fairness concerns may have a decisive impact on the actual and optimal choice of contracts in a moral hazard context. Bonus contracts that offer a voluntary and unenforceable bonus for satisfactory performance provide powerful incentives and are superior to explicit incentive contracts when there are some fair-minded players. But trust contracts that pay a generous wage upfront are less efficient than incentive contracts. The principals understand this and predominantly choose the bonus contracts. Our results are consistent with recently developed theories of fairness, which offer important new insights into the interaction of contract choices, fairness and incentives.