George Economides

Optimal Protection of Property Rights in a General Equilibrium Model of Growth

We incorporate weak property rights into an otherwise standard general equilibrium model of growth and second-best optimal policy. In this setup, the state plays two of its key roles: it protects property rights and provides public services. The government chooses policy (the income tax rate, as well as the allocation of collected tax revenues between law enforcement and public services) to maximize the growth rate of the economy. The focus of our analysis is on how weak property rights generate multiple decentralized competitive equilibria, the different properties of these equilibria, and the implications of second-best optimal policies.

HOW SHOULD THE GOVERNMENT ALLOCATE ITS TAX REVENUES BETWEEN PRODUCTIVITY- ENHANCING AND UTILITY- ENHANCING PUBLIC GOODS?

We present a fairly standard general equilibrium model of endogenous growth with productive and non-productive public goods and servives. The former enhance private productivity and the latter private utility. We solve for Ramsey second-best optimal policy (where policy is summarized by the paths of the income tax rate and the allocation of the collected tax revenues between productivity-enhancing and utilityenhancing public expenditures). We show that the properties and implications of second-best optimal policy (a) differ from the benchmark case of the social planner’s first-best allocation (b) depend crucially on whether public goods and services are subject to congestion.

How elections affect fiscal policy and growth: revisiting the mechanism

Abstract This paper reconsiders the popular result that the lower is the probability of reelection, the greater is the incentive of incumbent politicians to choose short-sighted, inefficient policies. The set-up is a general equilibrium model of economic growth, in which fiscal policy is endogenously chosen under electoral uncertainty. Political parties can value possible economic benefits differently depending on whether they are in or out of power, and—by contrast with the literature—the relevant preference coefficient is a choice variable rather than an exogenous taste parameter. The main result is that, when political parties choose both economic policy instruments and preference coefficients, the fundamental reason for short-sighted policy is the extra rents from being in power per se.

Fiscal Policy, Rent Seeking, and Growth under Electoral Uncertainty: Theory and Evidence from the OECD

We construct a general equilibrium model of economic growth and optimally chosen fiscal policy, in which individuals compete with each other for a share of government spending and two political parties alternate in power according to exogenous electoral uncertainty. The main prediction is that uncertainty about remaining in power results in increased fiscal spending, which in turn distorts incentives by pushing individuals away from productive work to rent-seeking activities; then, distorted incentives hurt growth. This scenario receives empirical support in a dataset of 25 OECD countries over the period 1982-96. In particular, uncertainty about remaining in power leads to larger government shares in GDP, which in turn exert an adverse effect on the ICRG index measuring incentives and this is bad for growth.

Do political incentives matter for tax policies? Ideology, opportunism and the tax structure

This paper investigates the importance of political ideology and opportunism in the choice of the tax structure. In particular, we examine the effects of cabinet ideology and elections on the distribution of the tax burden across factors of production and consumption for 21 OECD countries over the period 1970-2000 by employing four alternative cabinet ideology measures and by using the methodology of effective tax rates. There is evidence of both opportunistic and partisan effects on tax policies. More precisely, we find that left-wing governments rely more on capital relative to labor income taxation and that they tend to increase consumption taxes. Moreover, we find that income tax rates (but not consumption taxes) tend to be reduced in pre-electoral periods and that capital effective tax rates (defined broadly to include taxes on self-employed income) are reduced by more than effective labor tax rates.

Rent Seeking,Growth and Pre-election Policies

We construct an otherwise standard general equilibrium model of economic growth and optimally chosen fiscal policy, in which individuals compete with each other for extra fiscal transfers and two political parties compete with each other for staying in power. The main prediction is that relatively large public sectors in pre-election periods distort incentives by pushing individuals away from productive work to rent seeking activity; in turn, distorted incentives hurt growth. We test this prediction by using a panel data set of a group of 25 OECD countries over the period 1982-1996, as well as a cross-section of 108 industrial and developing countries over the decade 1990-2000. Indeed, there is evidence that measures of electoral and political instability cause high government shares in GDP, which in turn exert an adverse effect on the ICRG index measuring incentives, and all this is bad for growth.

The Greek great depression:a general equilibrium study of its drivers

This chapter provides a quantitative study of the main determinants of the Greek great depression since 2010. The authors use a medium-scale DSGE model calibrated to the Greek economy between 2000 and 2009 (the euphoria years that followed the adoption of the euro). Then, departing from 2010, simulations show that the fiscal policy mix adopted, jointly with the deterioration in institutional quality and, specifically, in the degree of protection of property rights, can explain essentially all the total loss in GDP between 2010 and 2015 (around 26%). In particular, the fiscal policy mix accounts for 14% of the total output loss, while the deterioration in property rights accounts for another 8%. It thus naturally follows that a less distorting fiscal policy mix and a stronger protection of property rights are necessary conditions for Greece’s economic recovery.