Dieter Bös

Earmarked taxation: welfare versus political support

Compared with the traditional public-finance approach of a monolithic fully informed planner, earmarking of taxation is less likely to be optimal if a principal-agent setting is considered, where taxing and spending are performed by two separate agents which are monitored by the parliament. We assume that the parliament either maximizes welfare or expected votes. Vote maximizers are more inclined to choose earmarking, but at the price of inefficiently high costs.

Privatization of public enterprises

In this paper the following results of a transition from public to private ownership are obtained: The manager of a public firm engages in less effort than is efficient; in a privatized firm the managers effort is chosen efficiently. The reward to the manager of a public firm is more differentiated than efficient. In the case of an unfavourable economic environment the reward is higher than efficient. On the other hand, the manager in a privatized firm is always rewarded efficiently. It is irrelevant whether the public manager is incompletely informed about the particular mix of governments multiple objectives as long as the government chooses the incentive-compatible reward for the manager.

Privatization, internal control, and internal regulation

Abstract This paper develops a theory of the privatization of public enterprises. The relevant decisions are modelled as a three-stage process: internal control, internal regulation, and privatization. Privatization is a move from an overcontrolled public firm to an overcontrolled private firm. The firm never achieves the optimal extent of control because the necessary replacement of public by private managers leads not only to the desired reduction of bureaucracy, but also to an undesired increase in profits. Moreover, the reduction of overbureacratization is matched by a reduction in the quality of the supplied goods.

Quality and outside capacity in the provision of health services

Abstract This paper studies the effects of non-contractibility of investment on the choices made by a health authority and a hospital which supplies a specific service. Non-contractibility determines inefficiencies: compared with any Pareto efficient outcome, the quality of the service chosen by the hospital is too low, and the health authority relies too much on outside providers.

The Hold-Up Problem in Government Contracting

A two-period procurement model is considered in an incomplete-contract framework. In contrast to O. Hart and J. Moore (1988), the welfare-maximizing government, as the buyer, is able to accomplish ex-ante optimal contracts which guarantee first-best specific investments of both buyer and seller. These contracts are precisely characterized. Regardless of the underlying supports of cost and benefit distributions, renegotiation inevitably occurs in some states of nature. This renegotiation always increases the ex-ante fixed trade price. Hence, the empirical observation of soft budget constraints in government contracting can be rationalized. Furthermore, in accordance with common beliefs, the sellers rents accrue only at the production stage. Copyright 1996 by The editors of the Scandinavian Journal of Economics.

Double inefficiency in optimally organized firms

Abstract The management of a single-product monopoly sets the number of employees and the number of production teams which are to be established. However, it is well known that employees shirk in teams. Moreover, there is yet another inefficiency which is caused through the managements adjustment to its uncertain environment. The management will not choose the internal organization of the firm which minimizes costs, because this would reduce the expected revenue (or surplus if it manages a public firm). Public firms are more likely to choose a technology where cost inefficiency and shirking reinforce each other. Government price regulation fails to eliminate cost inefficiency.

Anarchy, Efficiency, And Redistribution

The purpose of this paper is twofold. We first develop a contractarian theory of redistribution. The existence of rules of redistribution is explained without any recourse to the risk-aversion of individuals. Hence, we depart from the standard legitimization of redistribution as fundamental insurance and interpret it as stemming from a principle of reciprocity in trade. The second purpose of the paper is to develop a theory of institutions that implement optimal allocations. We depart from the assumption of an exogenous enforcement of constitutional rules. Hence, the self-enforcement of constitutional rules is crucial for the implementability of allocations. This approach implies that there is no allocative difference between constitutional and ordinary rules. What makes constitutions different from ordinary rules is their potential ability to create a focal point that conditions the expectations of individuals on a certain equilibrium strategy. Hence, constitutions help to solve coordination problems, not cooperation problems.

Privatization, Price Regulation, and Market Entry - An Asymmetric Multistage Duopoly Model

This paper deals with a privatized firm facing potential market entry. The firm has inherited excess capacity from its public past. The players have asymmetric costs. Only the entrant must install new capacity, which incurs positive capacity installation costs. The paper considers the subgame perfect equilibria in a four-stage game with perfect foresight. The incumbent and the entrant first decide on the capacities and subsequently on the prices. In both cases the incumbent moves first. The second main part of the paper deals with price-cap constraint on the incumbent. The paper shows that a binding price constraint does not necessarily lead to an increase in capacity and output (capacity trap). If the price constraint is binding and market entry occurs, the entrant sells at a higher price than the incumbent.

Income Taxation, Public Sector Pricing and Redistribution

Income taxation and public sector pricing are considered in an integrated control-theory model of the Mirrlees tradition. It is shown that the often alleged separability between income taxation as a purely distributional instrument and public pricing as a purely allocational instrument usually does not hold. Rather, in our model, public prices have to resemble the distributionally modified public prices proposed by Feldstein (1972). Application of the fiscal policy instrument “public pricing” restricts the distributional task of income taxation. Our results differ considerably from the direct-indirect taxation controversy because the assumption of constant returns to scale cannot be imposed in a model of public pricing.

Crisis of the tax state

SummaryThis paper presents a simple model of the ‘tax state’, where a progressive income tax is used to finance publicly supplied goods that are distributed free of charge. The individual citizens may be dissatisfied with such a fiscal system. If more than 50% are dissatisfied, we speak of a ‘crisis of the tax state’.Such a crisis becomes more probable, if the allocational and distributional instruments are chosen inadequately, if the disincentive effects of the progressive tax increase and if the inefficiency of public supply increases. Paradoxically such a crisis becomes more improbable, if people want a smaller public sector.Moreover, it has been shown that the psychological attitudes of the consumers and the inefficiency of public supply may bring about an ‘absolute’ crisis of the tax state. In such a situation there do not exist any realizations of tax-state instruments that are supported by a majority.