Jayasri Dutta

A portfolio approach to the optimal funding of pensions

Abstract Fully funded pension systems are advocated for their higher rate of return, but this return is typically risky. Using a simple mean-variance model, we find that mixed funded–unfunded systems are desirable in this setting because they enable risk diversification.

The Retrenchment Hypothesis and the Extension of the Franchise in England and Wales

Does an extension of the voting franchise always increase public spending or can it be a source of retrenchment? We study this question in the context of public spending on health-related urban amenities in a panel of municipal boroughs from England and Wales in 1868, 1871 and 1886. We find evidence of a U-shaped relationship between spending on urban amenities and the extension of the local voting franchise. Our model of taxpayer democracy suggests that the retrenchment effect was related to enfranchisement of the middle class through nation-wide reforms and that these reforms might have been Pareto inferior in the average borough.

Policy Compromises: Corruption and Regulation in a Democracy

This paper evaluates the extent of regulation in a democracy with corruption. Elected politicians can restrict entry of firms in exchange for bribes from entrepreneurs. Full liberalization implies free entry and allocative efficiency. Voters re-elect politicians based on observed performance. We demonstrate that voters agree to tolerate corruption and inefficient regulation; that efficient policies can be promoted by productivity growth; that productivity growth reduces the cost of providing wage incentives; and that corruption is procyclical and economic policy is countercyclical in a corrupt democracy.

Policy Myopia and Economic Growth

We develop a theory of second best policy myopia. Policy myopia arises when rational voters allow politicians to bias public investments towards short-term investments. We demonstrate that policy myopia is not an inevitable implication of the fact that voters cannot observe immediately how much their politicians invest in certain types of public goods; rather it is the interaction between observation lags, economic growth and binding revenue constraints that forces rational voters to accept a short-term bias. We argue that growth in government and policy myopia are related social phenomena. The analysis is motivated by stylized facts about public spending patterns.

Dread of Depreciation; Measuring Real Exchange Rate Interventions

We specify an empirical framework to detect the effects of official intervention on real exchange rate dynamics. Using data for 27 advanced and emerging market economies, we find evidence that interventions are a near-universal practice; almost all countries intervene when real exchange rates depreciate; interventions reduce the degree of persistence in real exchange rates; and the defense of an overvalued currency tends to be contractionary.

Growth, Governance and Corruption in the Presence of Threshold Effects: Theory and Evidence

We study the joint determination of corruption and economic growth. Our model can generate multiple equilibria when complementarity between corruption and growth is sufficiently strong. Our estimates of the impact of corruption on growth take into account that corruption is endogenous and that there may exist different growth/corruption regimes. In a cross section of countries in the 1990s,we identify two regimes, conditional on the quality of political institutions. In the regime with high quality political institutions, corruption has a negative impact on growth. In the regime with low quality institutions, corruption has, overall, little impact on growth, but, if anything, the impact is, surprisingly, positive.

The distributional effects of education expenditures

We evaluate the long-run distributional effects of cuts in the public expenditure on education. The article simu lates a dynamic model of the earnings distribution. Earnings of individuals differ because of differences in innate ability, and additionally if their education levels differ. We model a dual system of education as in the UK or US, where the state finances public education by taxation. Parents may choose to educate their children privately by spending more. Using parameter values estimated by other researchers for the UK, we evaluate the likely long-run impact of changes to education expenditures. These estimates suggest that the long-run impact of modest changes to public education expenditures on the inequality of earnings are likely to be substantial.

Consumption and the Means of Payment: An Empirical Analysis for the United Kingdom

In this paper the authors specify and estimate a model of consumption and cash holdings with multiple means of payment, using data for the United Kingdom. The model describes a technology for transactions, where cash and credit are imperfect substitutes in paying for consumption expenditure. The model allows the identification of the parameters of, and shocks to, the transactions technology. The value of long-term changes in the payments systems to the representative consumer, as well as the welfare cost of inflation from 1920 to 1990 are evaluated. The cash-in-advance model is equivalent to a parametric restriction on the technology, which is rejected by the data.

Policy compromises: corruption and regulation in a dynamic democracy

This paper evaluates the extent of regulation in a democracy with political corruption. Elected politicians can restrict entry of firms in exchange for bribes from entrepreneurs. Full liberalisation implies free entry and allocative efficiency and is supported by a majority of voters. Voters reelect politicians based on observed performance. We study Markov-perfect equilibria of the resulting game, and demonstrate that voters agree to tolerate some corruption and inefficient regulation in political equilibrium. Efficient policies can be promoted by productivity growth. Political corruption entails excessive stabilization of aggregate fluctuations.

Learning by observation within the firm

This paper studies the effects of learning by observation on the production and wage decisions of a firm . Workers can improve their productivity by observing others within the firm. The firm chooses a wage profile, which determines the amount of research done within the firm. Some workers may choose to free ride on the research of others. We examine whether the firm will have increasing returns to scale in production. It turns out that the production function either satisfies the efficiency wage hypothesis, or has increasing returns to scale. The objectives of the firm determine which of the two regions its production schedule lies in.