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Unemployment benefit schemes have been explained by Bailey (1978) and Fleming (1978) as insurance against the risk of job loss. Boadway and Oswald (1983) and Wright (1986) have considered the political economy aspects of such insurance. Zeckhauser (1971) and Cooter and Helpman (1974), among others, alternatively rationalize transfer payments to the non-working poor as acts of altruism. This contribution offers a third rationale for unemployment benefits stemming from the fact that exits by relatively unproductive workers from the work force may in fact increase the productivity of remaining workers. This is the case if there are peer group effects in the work place in the sense that a worker's productivity depends on the quality of his co-workers as well as on his own quality. Henderson, Mieszkowski, and Sauvageau (1978) and Arnott and Rowse (1987) argue that such peer groups are important in the classroom setting, and they suggest that peer group effects may equally be important in the work place. Along similar lines, Sala-i-Martin (1992) introduces labor productivity externalities to explain mandatory retirement of older workers in a growth context.
Huizinga (1994) considers tax and transfer policy in a model of labor quality externalities for the case where the tax authorities have two fiscal instruments: (i) lump sum unemployment benefits, and (ii) proportional labor income taxes. This chapter extends Huizinga (1994) by introducing a third fiscal instrument: a lump sum tax (or transfer) to all workers regardless of their employment status.
This book investigates how observed differences in institutions affect political and economic outcomes in various social, economic, and political systems. It also examines how the institutions themselves change and develop in response to individual and collective beliefs, preferences, and strategies. This volume tackles both monetary and real topics in an integrated way, and represents the first coherent empirical investigation of positive models of political economy. The various contributions discuss issues of great topicality not just for Europe, but for all developed economies: why do central banks matter? What determines their independence? How do central bank independence and exchange rate regimes affect monetary integration and activism? The volume also discusses the costs of a monetary union, unemployment benefits, and redistributive taxation.
Positive political economy investigates how observed differences in institutions affect political and economic outcomes in various social, economic and political systems. It also inquires how the institutions themselves change and develop in response to individual and collective beliefs, preferences and strategies. As stated by Persson and Tabellini (1990) in their book on macroeconomics and politics: “The future research agenda ought to give high priority to modeling the details of political institutions. Adding institutional content is necessary to sharpen the empirical predictions of the theory.” The essays on political economy collected in this volume aim to be part of this research agenda.
The modern theory of macroeconomic policy, and of monetary policy in particular, focuses on the game-theoretic interactions between private agents and policy makers where the private sector rationally anticipates economic policy. The variety of interests at stake in the conduct of monetary and exchange rate policy renders it a fertile area for political economists. At the same time, monetary institutions are currently in a state of flux, especially in Europe. The prospect of a European Monetary Union by January 1999 has heightened the interest in the design of central banking institutions, while a renewed popularity of fixed exchange rate regimes worldwide has prompted a fresh academic interest in the choice between fixed and flexible exchange rates and in the determination of capital controls.
The CentER for Economic Research of Tilburg University organized an international conference with the title “Positive political economy: theory and evidence” on January 23–4, 1995.