T. Norman Van Cott

The determinants of the choice between public and private production of a publicly funded service

The public choice literature contains little formal analysis of the bureaucratic choice of production modes — public or private — of publicly funded services. An important question to be addressed is why some governmental bodies choose to provide a publicly funded service with publicly owned and operated production units whereas other governmental bodies contract with private firms to provide the same publicly funded service. This paper is the first formal attempt to remedy this gap in the literature. We develop a theoretical explanation of the government decision makers choice between public and private production modes based on utility maximizing behavior. We then examine empirically this choice employing logit analysis. The empirical results, which include several tests for robustness, confirm our theoretical explanation. The results are significant and suggest that non-monetary constraints are an important factor affecting this choice of production modes and that monetary constraints are less influential.

Public versus private economic activity: A new look at school bus transportation

Concluding remarksThomas Borcherding (1977), in commenting on the public-versus-private literature, offered the generalization that removal of an activity from the private to the public sector will double its unit costs of production. The results of this paper obviously are not consistent with Borcherdings ‘rule of two’ generalization. At the same time, however, the 12% cost-per-mile differential in favor of private ownership indicated by the results for the overall sample is not a trivial sum in absolute terms. The cost-per-mile differences in favor of private buses contained in the five trip groups are not trivial either, nor is the direct evidence from the 82 joint systems. In attempting to assess the results, much depends on the perspective against which they are judged.Several factors suggest themselves concerning the ‘smallness’ of the differential. First, school bus transportation is a part of the education budget. Despite the lack of incentives implicit in public ownership, competition within the educational bureaucracy for a limited budget can result in ‘abnormally’ low cost public ownership. Second, and related to the first, is the fact that public and private ownership are in close proximity to each other — sometimes within the same school district. This proximity may lead to additional competitive pressures on public ownership. That school district residents can relocate based on school transportation considerations adds to this competitive pressure. To the extent that these first and second factors account for the smallness of the differential, our statistical results are consistent with the hypothesis that it is not public ownership per se that produces more costly public operations but, rather, the lack of effective competition. Third, although the contracting system is administered through open, competitive bidding, the district administrator responsible for the process has no direct claim on a dollar saving realized by the process. One would think that actual bid prices might be lower if the administrators incentive to secure a lower bid price were greater. Finally, note that school bus transportation is technologically simple. Thus, private owners have less room to be innovative and entrepreneurial, meaning a reduced differential between public and private ownership.On the other side of the ledger, it remains that private ownership appears less costly. To explain the estimated cost differences in this study in an economic sense is to explain where the lack of incentive effects in public ownership find their outlets in terms of higher costs. Two primary factors appear to be responsible for the ‘largeness’ of the cost differential. First, as stated earlier, district-owned buses in Indiana are newer than contractor-owned buses. Capital costs related to public ownership — forgone interest income and economic depreciation — are, therefore, greater than these costs for private ownership. To the extent that this newer age structure is not indicative of higher quality output, it follows that school district officials, who do not have a direct claim on the benefits of economizing on capital, are providing higher capital cost transportation. Second, trip lengths for district-owned buses are shorter than the trip lengths of contractors. With declining cost per mile as trip length increases, shorter trip lengths imply higher cost per mile. Again, district officials and public bus drivers have less incentive to efficiently design bus routes served by district-owned buses; whereas one would expect the input of private contractors to impact favorably on the design of private routes.Even though the results of this study do not support the Borcherding generalization, they are still strong enough to have important public policy implications. The fact that almost 70% of school buses in the United States are district owned and to the extent that Indiana cost experience approximates that of the other states, substantial dollar savings could result from privatizing the provision of school bus transportation.

Product Quality and Taxation: a Reconciliation

Within the last few years, two articles in this journal (one ours) have discussed the relationship between product quality, excise taxes, and tax revenue. The articles are marked by seemingly contradictory results regarding the effect specific taxes and ad valorem taxes have on product quality. This article reconciles the contradiction. The authors show that the difference stems from opposite assumptions about the substitutability between physical units and their quality attributes. For all intermediate substitutabilities, the tax-quality relationship of this article is relevant for specific taxes, while the tax-quality relationship of the other article is relevant for ad valorem taxes.

Specific Taxes, Product Quality, and Rate-Revenue Analysis

The effect that specific taxes have on product quality has been a question of interest to economists over the last few years. The problem arises because while goods and services are multidimensional in terms of utility generating characteristics, specific taxes are almost always levied on just one of the characteristics. The effect of quality adjustment on tax revenue has not yet been examined in any detail. Quality adjustment is no doubt a change that occurs over a longer-run time frame. Heretofore, the only attempts at adding a temporal dimension to rate-revenue analysis distinguish between the short run and long run in terms of supply and demand elasticities. In the previous analysis the tax rate at which revenue is maximized and the tax rate at which revenue reaches zero are both lower in the long run. What makes the analysis presented here interesting is that when product quality accounts for the intertemporal distinction, the revenue maximizing tax rate and the tax rate that yields zero revenue are both higher in the long run.

Public Choice at the Little Bighorn

History professors have long portrayed Custer’s stand at the Little Bighorn River in terms of the managerial quirks and personality flaws of the central characters. The discussion in Evan Connell’s (1984) book, Son of the Morning Star, illuminates the Last Stand in terms of economic incentives. In this paper we argue that Custer’s legendary Last Stand offers economics instructors with an extraordinary opportunity to pique students’ interest in the public choice paradigm.

Restrictive Versus Permissive Money: Two Is-Lm Views of Pure Fiscal Action

Analyzing pure fiscal actions in an IS-LM setting is a common exercise in current macromonetary textbook literature. As far as the role these analyses Abstract assign to the monetary sector is concerned, this literature offers two contradictory portrayals. One describes thefiscal actions initial impact on aggregate demand as independent of monetary adjustments. The monetary sector in this view is relegated to a secondary restrictive role. The other view depicts the initial impact of the fiscal action as being grounded in a simultaneous and supportive monetary disequilibrium. This disequilibrium, moreover, is seen as persisting throughout the multiplier process. Little attention has been directed to this contradiction, even though fundamentally different perspectives on the role played by monetary adjustments are involved. This paper contains an outline of the nature of the contradiction and a discussion ofthefactors important in its resolution.

A Supply and Demand Exposition of a Constitutional Tax Loophole: The Case of Tariff Symmetry

The U.S. Constitution permits import tariffs but bans export duties. Yet import taxes are de facto export taxes, just as export taxes are de facto import taxes. Access to this symmetry proposition has been limited by its illustration being in daunting analytics largely restricted to international economics. This is unfortunate. Tariff symmetry exposes a tax loophole of constitutional proportions, a case where economics “trumps” the intentions of Americas Founding Fathers. Moreover, tariff revenue was the U.S. governments pivotal revenue source from 1789 until the 1913 constitutional sanctioning of the income tax. Because U.S. exports were heavily agricultural, tariff symmetry implies that federal taxation had an export dimension with disparate economic and regional consequences. By making tariff symmetry more accessible, this paper lowers the “cost” of examining important issues.

Constitutional Agreement during the Drafting of the Constitution: A New Interpretation

We provide a new interpretation of one of the “great” but in our view “failed” North‐South agreements during the U.S. Constitution’s drafting. In 1787, lower South delegates to the Constitutional Convention reputedly settled for a simple‐majority congressional vote for commercial regulations in exchange for northern delegates reputedly agreeing to limitations on national slave import restrictions and an export tariff prohibition. We document that the overall South gained little from the agreement because (1) import taxes are de facto export taxes, (2) the simple‐majority rule was costly to southern interests, and (3) the slave import provision was limited. The agreement represents serious economic and political miscalculation by southern framers. Because the agreement was at a constitutional level, it endowed the nation with decades of unforeseen and unintended constitutional and sectional conflict that played a critical role in American public finance and southern secession and has important implications for contemporary constitution making.

The Ruthless Fed: A Critique of the AST Hypothesis

ConclusionThis paper examines the hypothesis that the Great Contraction was the result of rational rent-seeking by members of the Federal Reserve System. In contrast to the AST hypothesis, evidence on the share prices of member banks that survived the contraction suggests that the owners of these banks suffered an absolute decline in real wealth and a decline relative to a broad spectrum of other investment alternatives. Furthermore, monetary surprises had no statistically discernible effect on the share prices of these banks. This evidence conflicts with the notion that rational rent-seeking would lead the owners of member banks and their bureaucratic conspirators in the Federal Reserve System to unleash a policy with the goal of contracting the money supply by 35 percent.

A Supply and Demand Exposition of the Operation of a Gold Standard in a Closed Economy.

Neither short-run nor long-run price stability is a necessary state of affairs under a gold standard, according to the authors. This conclusion results from an examination of possible differential rates of productivity growth in the gold and non-gold producing sectors.