Umeå Economic Studies,
Umeå University, Department of Economics

Abstract: This thesis consists of a summary and four papers. The first two papers are theoretical contributions within the area of optimal taxation and public expenditures under asymmetric information between the government and the private sector, and the last two are empirical contributions to the literature on local public expenditures. Paper [I] concerns the optimal use of publicly provided private goods in an economy with equilibrium unemployment. The paper points out that imperfect competition in the labor market gives rise to additional policy incentives associated with the self-selection constraint, which motivates adjustments in the public provision of private goods. It also addresses employment related motives behind publicly provided private goods. Paper [II] addresses optimal income and commodity taxation in a dynamic economy, where used durable goods are subject to second-hand trade. In our framework, the government is unable to directly control second-hand transactions via commodity taxation. We show how the appearance of a second-hand market affects the use of commodity taxation on the new durable goods as well as the use of income taxation. Paper [III] relates the existence and size of the flypaper effect to observable municipal characteristics. The analysis is based on a political economy model, which implies that the effect of a change in the tax base on the majority voter's tax share will be crucial for finding a flypaper effect. The empirical part is based on Swedish data on municipal expenditures and revenues for the period 1996-2004. The results show that the size of the flypaper effect varies among municipalities depending on the relative composition of grant and tax base. In Paper [IV], the composition of municipal expenditures in Sweden is analyzed by estimating a demand system for local public services, in which tax revenue collection is treated as endogenous. The estimation is based on the QAIDS specification and uses panel data for the period 1998-2005 and for six local public services. The results show that the point estimates of the income elasticities are positive (with one exception), whereas the point estimates of the own-price elasticities are negative and less than one.

Keywords: optimal taxation; unemployment; durable goods; flypaper effects; intergovernmental relations; demand system; local government spending

JEL-codes: D12; D31; D91; H23; H72; H77; J51

168 pages, March 10, 2008

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