SECTION A
PLEASE ANSWER ONE OUT OF THE TWO QUESTIONS [TOTAL MARKS 50]
QUESTION 1
(a) Consider Table 1, below, from Becker, Fetzer and Novy (2017) “Who voted for Brexit? A comprehensive district-level analysis”. The dependent variable in all columns is the share of votes for ‘Leave’.
(i) Interpret the estimated coefficients for the independent variables Share of resident population no qualifications growth (2001-2011), Share of resident population qualification 4+ (2001) and Population 60 years and older (2001) in column (7). Comment on how well this model fits the data. [10 Marks]
(ii) What do the authors argue to be the main drivers of the ‘Leave’ vote share? [5 Marks]
(b) Discuss arguments supporting the following sentence: ‘Investment in building new highways should be undertaken by the central government, whereas road maintenance should be mainly the responsibility of local governments’. [10 Marks]
(c) Discuss the differences between price-based and quantity-based measures to combat negative production externalities. [15 Marks] (d) Discuss the relative costs and benefits of decentralisation. [10 Marks]
QUESTION 2
(a) Using a diagram, show how an increase in the income tax rate will affect labour supply. Discuss equity and efficiency concerns with regard to income taxation. [25 Marks]
(b) Discuss the estimates for labour supply elasticities provided in Table 8 below for some European countries. Do the findings agree with the main conclusions in the literature about differences in labour supply elasticities between men and women? [15 Marks]
(c) Discuss the informational problems related to the market for private health care insurance. [10 Marks]
SECTION B
PLEASE ANSWER ONE OUT OF THE TWO QUESTIONS IN THIS SECTION [TOTAL MARKS 50]
QUESTION 3
a) Describe Arrow's impossibility theorem, which states that any voting system can give undesirable outcomes. What restrictions do we have to impose in order to avoid instability? [10 Marks]
b) (i) Show algebraically the tax rate that is preferred by citizen i. Explain your answer. [Marks 6]
(ii) If two office seeking politicians compete for the office, which taxation policy prevails in this environment? [Marks 6]
(iii) Which income categories win and which income categories lose by the policy that prevails? [Marks 8]
c) Consider the following tables from the study of Acemoglu et al. (2015) “Democracy, Redistribution and Inequality”. The dependent variables in Tables 2 and 3 are the log of Tax revenues (% of GDP) and the Gini coefficient (net income), respectively.
i. Are the results for the main independent variable – Democracy lagged – consistent with the Meltzer and Richard (1981) “A Rational Theory of the Size of Government” theoretical model? [10 Marks]
ii. What is the economic significance of the results, and what explanation is provided by the authors for the findings in the two Tables? [10 Marks]
QUESTION 4
a) Explain the critique of Milanovic (2000) “The median-voter hypothesis, income inequality and income redistribution: an empirical test with the required data” of researchers who attempted to assess the median voter hypothesis. What is the main contribution of his study? [Marks 20]
b)(i) Derive the indirect utility function of individual i. [10 Marks]
(ii) What is the optimal tax rate preferred by individual i? Discuss the main theoretical implications of this result. [10 Marks]
c) Consider the following table from the study of Karabarbounis (2011) “One dollar, one vote”. The dependent variables in columns 1 and 2 of Table 4 are Total Public Social Expenditure (% of GDP) and Total Public Social Expenditure net of health and pensions (% of GDP), respectively, whereas yk y is the gross earnings of the worker in the kth percentile of the gross earnings distribution divided by mean gross earnings for k= 90, 50, 10.
Explain why the author deviates from the rest of the literature by introducing three inequality statistics in the empirical specification instead of one (e.g., Gini coefficient). According to the results for the three inequality statistics, what explanation is provided for the politico-economic equilibrium?
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