CPB Discussion papers 2009
n° 136, décembre 2009
The impact of social capital on crime: Evidence from the Netherlands
AKCOMAK I. Semih, TER WEEL Bas
This research shows that social capital is important in explaining why crime is so heterogeneous across space. Social capital is considered as a latent construct composed of a variety of indicators, such as blood donations, voter turnout, voluntary contributions to community well-being, and trust. To isolate exogenous variation in social capital, three historical variables are used as instruments: the fraction of foreigners, the number of schools and the fraction of Protestants in 1859. The historical information provides heterogeneity across municipalities in these three variables. In an application to Dutch municipalities the 2SLS estimates suggest that the exogenous component of social capital is signi cantly and negatively correlated with current crime rates, after controlling for a range of contemporaneous socio-economic indicators. Next, the robustness analysis shows why some social capital indicators are more useful than the others in applied economic research.
n° 135, décembre 2009
Contracting Welfare-to-Work Services: Use and Usefulness
KONING Pierre
This paper contributes to the broad literature on public services contracting in two ways. First, we provide an empirical analysis of contracting decisions in the provision of welfare-to-work (WTW) services. We estimate both the WTW-contracting decisions of Dutch municipalities and their impact on the performance, measured as the fraction of Social Assistance recipients. Second, we explicitly model two forms of external provision of WTW services by municipalities: contracting with other municipalities and/or contracting out services to private providers. Our findings suggest that contracting decisions are predominantly driven by cost considerations, both for the decision to contract with other municipalities and the share of contracting out to private providers. Municipalities with low WTW budgets or facing budget constraints are more likely to contract with external parties – presumably this reduces their costs and as well as the risk of future cost deficits. We do not find contracting decisions to affect the performance of municipalities, measured as the use, inflow or outflow out of the SA scheme. From this alone, however, we cannot conclude that both the three provision modes are equally cost-effective too, as external provision may be less costly.
n° 134, novembre 2009
Cream-skimming, Parking and other Intended and Unintended Effects of Performance-Based Contracting in Social Welfare Services
KONING Pierre, HEINRICH Carolyn J.
In a growing number of countries, the delivery of social welfare services is contracted out to private providers, and increasingly, using performance-based contracts. Critics of performancebased incentive contracts stress their potential unintended effects, including cream-skimming and other gaming activities intended to raise measured performance outcomes. We analyze the incentive effects of performance-based contracts, as well as their impacts on provider job placement rates, using unique data on Dutch cohorts of unemployed and disabled workers that were assigned to private social welfare providers in 2002-2005. We take advantage of variation in contract design over this period, where procured contracts gradually moved from partial performance-contingent pay to contracts with 100%-performance contingent reward schemes, and analyze the impact of these changes using panel data that allow us to control for cohort types and to develop explicit measures of selection into the programs. We find evidence of cream-skimming and other gaming activities on the part of providers but little impact of these activities on job placement rates. Overall, moving to a system with contract payments fully contingent on performance appears to increase job placements for more readily employable workers, although it does not affect the duration of their jobs.
n° 133, novembre 2009
Corporate tax harmonization in the EU
BETTENDORF Leon, VAN DER HORST Albert, DE MOOIJ Ruud A., DEVEREUX Michael P., LORETZ Simon
This paper explores the economic consequences of proposed EU reforms for a common consolidated corporate tax base. The reforms replace separate accounting with formula apportionment as a way to allocate corporate tax bases across countries. To assess the economic implications, we use a numerical CGE model for Europe. It encompasses several decision margins of firms such as marginal investment, FDI decisions, and multinational profit shifting. The simulations suggest that consolidation does not yield substantial welfare gains for Europe. The variation of effects across countries is large and depends on the choice of the apportionment formula. Consolidation with formula apportionment does not weaken incentives for tax competition. Tax competition instead offers a rationale for rate harmonisation, in addition to base harmonisation.
n° 132, novembre 2009
Corporate Tax Consolidation and Enhanced Cooperation in the European Union
BETTENDORF Leon, VAN DER HORST Albert, DE MOOIJ Ruud A., VRIJBURG Hendrik
This article assesses the economic implications of the introduction of consolidation with formula apportionment in the European Union under alternative enhanced cooperation agreements. We find that the consolidation is likely to yield a small aggregate welfare gain in Europe, but that not all countries benefit. A coalition of winning countries reduces the welfare gain and may induce a process of adverse selection which distroys the possibility of cooperation. We find that a coalition of similar countries (in terms of the size of their multinational sector) is more feasible in achieving agreement and is actually preferred by those countries over a European-wide reform.
n° 131, novembre 2009
Is Economic Recovery a Myth? Robust Estimation of Impulse Responses
TEULINGS Coen, ZUBANOV Nick
There is a lively debate on the persistence of the current banking crisis’ impact on output. Impulse Response Functions (IRF) estimated by Cerra and Saxena (2008) suggest that these effects will be long lasting. However, standard estimates of IRF’s are highly sensitive to slight degrees of misspecification. Moreover, adding fixed effects complicates inference on persistence. Direct estimation of IRF’s by a methodology similar to Jorda (2005)’s local projection method is robust to these specification errors. We apply this methodoloy to paneldata for 99 countries for the period 1974-2001. Our estimates suggest that an average banking crisis leads to an output loss of up to up to 9 percent, without any recovery within seven years. There are some indications for recovery for later years, but these are insignificant. We find some evidence for heterogeneity in the effect of a banking crisis.
n° 130, octobre 2009
Welfare analysis in transport networks
BESSELING Paul, VAN T'RIET Maarten
Should one calculate user benefits from changes in door-to-door journeys or from changes in the use of separate links of the network? Quite often, the second approach is deemed wrong, as consumers are supposed to demand journeys, not parts of journeys. However, we show that for a quite general economic model and under fairly general assumptions regarding the network, both approaches are equivalent. The cost-benefit analysis practitioner can exploit this result. The links approach reveals on what part of the networks user benefits and/or losses are generated. This additional piece of information might help to optimize the project design.
n° 129, octobre 2009
Optimal Tax Progressivity in Unionised Labour Markets; What are the Driving Forces?
BOETERS Stefan
In labour markets with collective wage bargaining higher progressivity of the labour income tax creates a trade-off. On the one hand, wages are lowered and unemployment decreases, on the other hand, the individual labour supply decision is distorted at the hours-of-work margin. The optimal level of tax progressivity within this trade-off is determined using a numerical general equilibrium model with imperfect competition on the goods market, collective wage bargaining and a labour-supply module calibrated to empirically plausible elasticity values. The model is calibrated to macroeconomic and institutional parameters of both the OECD average and a number of individual OECD countries. In most cases the optimal degree of tax progressivity is below the actual level. A decomposition approach shows that the optimal level is increased by high unemployment and by the general tax level.
n° 128, juillet 2009
An applied analysis of ACE and CBIT reform in the EU
DE MOOIJ Ruud, DEVEREUX Michael
We assess the quantitative impact of two reforms to corporation tax, which would eliminate the differential treatment of debt and equity: the allowance for corporate equity (ACE) and the comprehensive business income tax (CBIT). We investigate the impact of these reforms on various decision margins, using an applied general equilibrium model for the EU calibrated with recent empirical elasticities. The results suggest that, if governments adjust statutory corporate tax rates to balance their budget, profit shifting and discrete location render CBIT more attractive for most individual European countries. European coordination makes a joint ACE more, and a joint CBIT less, efficient. A combination of ACE and CBIT is always welfare improving.
n° 127, juillet 2009
Varieties and the terms of trade
HUIZINGA Free, SMULDERS Sjak
This paper analyzes the dynamic adjustment of the terms of trade in an intertemporal, two country model with endogenous product variety. In the base model, all workers are identical. In an extended version, the development of new varieties requires skilled labor while manufacturing uses skilled and unskilled labor. In the model without skill, a population increase in one of the countries has no effect on its terms of trade, not even in the short run. In the model with skill, the terms of trade initially worsen, but eventually return to their original level. The terms of trade immediately and permanently worsen in response to a productivity increase in manufacturing. However, they gradually improve if the productivity in variety research rises. If productivity in both activities rises equiproportionally, the terms of trade respond in the same manner as after a population shock.
n° 126, mai 2009
Discounting investments in mitigation and adaptation: a dynamic stochastic general equilibrium approach of climate change
AALBERS Rob
We use a dynamic stochastic general equilibrium model to determine efficient discount rates for climate (mitigation and adaptation) and non-climate investment in the face of climate change. Our main result is that the non-diversifiable risk in the economy may be related to both shocks in aggregate wealth and shocks in global average temperature. Therefore, both aggregate wealth and global average temperature will carry a risk premium reflecting their contribution to the total amount of non-diversifiable risk. We characterize both climate and non-climate investments by means of a contingent claim and show that climate and non-climate investments will in general be discounted at different rates. We discuss the conditions under which the discount rates of climate investments will be lower than the discount rate of non-climate investments.
n° 125, mai 2009
Management economics in a large UK retailer
SIEBERT W.S., ZUBANOV N.
We study the link between middle-management ability and store labour productivity using data from 245 stores of a UK nationwide retailer. The company scores six broad areas of management practice, the most important of which turns out to be "commercial awareness", where able managers achieve 17% higher labour productivity in their stores compared to less able ones. We further show that the managers’ incentive pay scheme, required to encourage them to exert their ability in full, is implicitly an insurance one, with managers taking a share in deviations of actual sales from expected. At the same time, abler managers do not receive higher pay all else equal, which implies that middle management ability is not fully tradeable.
n° 124, avril 2009
Agglomeration Economies in the Netherlands
GORTER Joeri, KOK Suzanne
The drift to the city has been going on for hundreds of years. As a result, most economic activity is concentrated in small geographical areas. The advantages of proximity of people and firms go under the name 'agglomeration economies'. In this paper, we measure their strength on the basis of Dutch regional data. We regress regional labour productivity on a set of agglomeration indices, and find evidence for a productivity effect of concentration of production with a malus for industrial variety. Thus, the evidence supports Marschall-Arrow-Romer economies. The evidence does not support, however, Jacobs economies, nor variants of the Creative Class Hypothesis.
n° 123, mars 2009
Competition for access; spectrum rights and downstream access in wireless telecommunications
BIJLSMA Michiel, ZWART Gijsbert
In the market for wireless telecommunications, radio spectrum is an essential input. We study downstream entry and capacity choice in this market, where licenses to use radio spectrum are owned by vertically integrated duopolists. Prior to network construction, these incumbents may offer contracts for capacity to an entrant, granting service-based access on the network they will construct. Alternatively, when spectrum trading is allowed, they may sell part of their license, allowing the entrant to build its own network and enter as an infrastructure player. We find that in this Cournot setting, access is generally provided, as incumbents compete to appropriate the profits of serving a differentiated market through the entrant. Although selling spectrum rights instead of network capacity leads to a loss of economies of scale in infrastructure construction, infrastructure-based entry may dominate as a result of a strategic effect. By delegating capacity choice to the entrant, the access providing incumbent can commit to compete more aggressively, causing its rival incumbent to reduce capacity. A lower aggregate capacity will increase prices and thereby profits.
n° 122, mars 2009
Why do macro wage elasticities diverge?; a meta analysis
FOLMER Kees
This study analyses macro elasticities of the gross yearly wage per employee. From some 90 books, articles and working papers, more than 1000 elasticities have been extracted. The results indicate that the dynamic specification of the wage equation, the choice of explanatory variables and restrictions on estimated coefficients all have their impact on estimated elasticities. From the results, we generate benchmark values for each type of elasticity that may be useful to calibrate policy simulation models.
n° 121, février 2009
Modelling health care expenditures: Overview of the literature and evidence from a panel time series model
VAN ELK Roel, MOT Esther, FRANSES Philip Hans
Health care expenditures in industrial countries have been growing rapidly over the past forty years. This rapid growth jeopardizes the sustainability of public budgets and causes an increasing interest in the determinants of health care expenditures. The first purpose of this paper is to give an up to date overview of the literature on health care expenditures. Secondly, this paper tries to contribute to the existing literature by investigating the impact of several factors on health care expenditures in an empirical analysis using an error-correction model. Additional to the 'usual suspects' for rising health care expenditures, we pay attention to a somewhat neglected driving factor, which is the increase in the relative price of health care compared to other goods and services. We find that the increasing price of health care helps to explain the increase in real health care expenditures. However, the use of health care in volume terms is negatively affected by the increasing price. This effect seems to be stronger in periods of cost containment policy. Consistent with most recent findings in the literature, we find that income and ageing are important drivers of health care expenditures.
n° 120, février 2009
The effects of competition on the quality of primary schools in the Netherlands
NOAILLY Joelle, VUJIC Suncica, AOURAGH Ali
We investigate the impact of competition between primary schools on the quality of education in the Netherlands. Do schools facing more competition in their neighbourhood perform better than schools facing less competition? As a measure of school quality, we look at the performance of pupils at the nationwide standard test (the so-called Cito test) in the final year of primary education. Since competition is likely to be endogenous to the quality of schools, we use the distance between the school and the town centre as an instrument for the level of competition faced by a school. The intuition is that schools located close to the town centre, which are easily accessible to a large number of parents, face more competition than schools located further away from the town centre. Using a large range of data on pupil, school and market characteristics, we find that school competition has a small positive significant effect on pupil achievement. An increase in competition by one standard deviation (comparable to 5 additional schools in the market) increases pupil achievement at the Cito test by five to ten percent of the mean standard deviation, so about less than one point. This result is robust to a large range of specifications.
n° 119, février 2009
Does employment affect productivity?
VAN DER HOLST A., ROJAS-ROMAGOSA H., BETTENDORF L.
We investigate the trade-off between employment and labour productivity in a panel of OECD countries in 1970-2003. The endogeneity of employment is shown to matter crucially for assessing its effect on productivity. Estimating a structural model with 3SLS, where employment depends on demographic variables and labour market institutions, we find that employment tends to boost productivity. Literature ignoring the endogeneity of employment, including our own OLS results, incorrectly finds a negative or insignificant effect from employment on productivity. The productivity gain is, however, not a guaranteed by-product of additional employment, as regressions with rolling windows reveal.
n° 118, janvier 2009
Pension plans and the retirement replacement rates in the Netherlands
VAN DUIJN M., LINDEBOOM M., LUNDBORG M., MASTROGIACOMO M.
This study examines the expected retirement replacement rates of several cohorts of Dutch employees at the time of their planned retirement. It also imputes the actual replacement rates based on available pension records. We find that using reasonable indexation rates, the expected replacement rate is higher than the one we compute. Larger discrepancies are found for younger cohorts. We decompose the difference between the two replacement rates and find that the mismatch is related to poor institutional knowledge. We also show the role of assumptions on institutions and wage profiles in determining our results.
n° 117, janvier 2009
Understanding the technoloy of computer technology diffusion: explaining computer adoption patterns and implications for the wage structure
BORGHANS Lex, TER WEEL Bas
We review the empirical literature about the implications of the computerization of the labor market to see whether it can explain observed computer adoption patterns and (long-term) changes in the wage structure. Evidence from empirical micro studies turns out to be inconsistent with macro studies that are based on CES production functions. We propose a micro foundation for the CES production function that allows for changes in the underlying structure. We adapt the macro model by incorporating computer skills, complementary skills and fixed costs for computer technology usage suggested by the micro literature. It turns out that fixed costs for computer technology usage explain different patterns of computer adoption and diffusion between several types of workers and countries; it also provides very plausible patterns of the timing of wage inequality and developments over time.
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