EconPol Working Paper Series

The functioning of public bureaucracies is considered a principal driver of government effectiveness and state capacity. Surveying more than 900 real-life procurement officials in Finland and Germany on the basis of hypothetical choice experiments the authors of this study find that bureaucratic decision-making is based to a large extent on intrinsic motivation. While bureaucrats lack important career or pay incentives, they have substantial discretion at work. Contracting officers value a certain degree of competition and consider (too) rigid regulation as the biggest threat to the procurement process. This supports previous research finding that in countries with high public sector capacity more rules are detrimental to procurement outcomes. Another important conclusion that can be drawn from the survey is that procurement bureaucrats aim to avoid negative risks concerning prices and supplier reputation as well as awarding public contracts to bidders with prior bad performance.

To mitigate the economic impact of the corona crisis many governments have heavily engaged in counter-cyclical policies contributing to record high deficit and debt levels. Therefore, the more efficient use of public resources will be given special attention by financial markets’ participants. For a sample of 34 OECD countries over the period 2007-2018, this study finds that increased public spending efficiency is indeed rewarded by the three main rating agencies Standard & Poors, Moody´s and Fitch through higher sovereign credit rating notations. And these in turn naturally imply lower funding costs for governments in capital markets - an important policy implication to consider in times of Covid-induced scarce budgetary resources.

Replacing minimum unemployment benefits with a guaranteed basic income of equal size has minor employment effects in an advanced country, researchers from the Finnish VATT Institute for Economic Research and the Labour Institute for Economic Research find. The study examined 2,000 benefit recipients in Finland who were randomized to receive a monthly basic income between 2017 and 2018. The experiment sought to remove potential welfare traps that unemployed persons face by diminishing administrative barriers through a monthly basic income combined with a considerable improvement in the monetary incentives for employment. The authors of the study find that the 95% confidence interval of the first-year primary outcome estimate, measured in annual employment days, ranges from -2.3 to 5.4, concluding that the experiment had minor employment effects at best.

Corruption has a negative effect on the economy - specifically on the level and growth of GDP - and large governments register less benefit from reducing corruption than small governments. This working paper from António Afonso and Eduardo de Sá Fortes Leitão Rodrigues finds that developing economies, regardless of government size, benefit less from reducing corruption and government size is not sufficient to explain the influence of corruption on economic activity - although the level of effectiveness of public services is crucial. The findings suggest that private investment is a potential transmission channel for corruption. 

The budget dispute between Italy and the European Commission in 2018 gave new impetus for the debate about the reliability of output gap estimation methods and their use for calculating structural budget balances. In this paper, Marcell Göttert and Timo Wollmershäuser review the main properties of the mainstream approaches. They show that the structural budget balances resulting from the production function approach and the time series approach are imprecise, subject to large revisions and often biased. Apart from these technical flaws, the mainstream approaches also suffer from political economy problems. As the computation of structural budget balances in the mainstream approach is difficult and model-dependent, it is not easy to explain to the public and prone to manipulation. In addition, the first ex post estimation is only available late with the first publication of GDP. The authors propose an alternative approach to calculate structural budget balances on the basis of a business survey.