ECONOMICS 550 PUBLIC EXPENDITURE

Semester: Winter 2015

Section B1: Tuesday and Thursday 9:30 – 10:50 AM
Location: Tory 1 83
Instructor: Professor Xuejuan Su
Office hours: Wednesday 3-5 pm at 9-22 Tory Building or by appointment
Email address: xuejuan1@ualberta.ca
Office phone: (780) 492-4198

Text: Many of the topics we cover in this course are discussed in Auerbach and Feldstein,
Handbook of Public Economics Vol. 2 & 4, North Holland, 1987 and 2002. The Handbook can
be accessed at http://www.sciencedirect.com/science/handbooks/15734420/.

Course Overview
This is the first course in the graduate public economics sequence. The course focuses on the
expenditure side of government activity, which is often used as an (imperfect) measure for
government activity in the economy. The second course, Economics 553, focuses on the
revenue side. While the distinction between expenditures and revenues is often helpful, it is not
always possible or advisable to separate the two sides entirely; thus, some issues of taxation
may be touched upon in this course. It is also not possible to thoroughly treat all aspects of
public expenditure in a single semester course, so a selection of topics must be made.

Attendance and Class Participation

There is no mandatory attendance requirement. However, attending class regularly will help
save your learning effort, better your understanding, and improve your final grade.

Recording of Lectures:
Audio or video recording of lectures, labs, seminars or any other teaching environment by
students is allowed only with the prior written consent of the instructor or as a part of an
approved accommodation plan. Recorded material is to be used solely for personal study, and
is not to be used or distributed for any other purpose without prior written consent from the
instructor.

Grades
There will be a mid-term exam, a presentation, and a final exam. The breakdown of the scores
is shown below, together with TENTATIVE exam dates.1

Mid-term Exam 30 % Date: February 26

Presentation 30 % Date: TBD
Final Exam 40 % Date: April 22, 9 – 11:30 AM.

Grades reflect judgments of student achievement made by your instructor. These judgments are
based on a combination of absolute achievement and relative performance in a class. There are
no extra credits or bonus points for this course. The overall grade distribution follows the
university guidelines.

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Other deadlines: January 16, Registration (Add/Delete); February 4, Fee Refund 50%; and finally, April 1,
Withdrawal (Grade W).

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Absence from Exams
If a student misses the mid-term exam because of incapacitating illness or other compelling
reason, the student is required to write an equivalent exam at a time set by the instructor. If the
student does not write the assigned make-up exam at the prescribed time, a raw score of zero
will be assigned for the missed exam (refer to Calendar, §23.5.6, Point 1).

A student who has missed a final exam because of incapacitating illness or other compelling
reasons (including religious conviction) may apply for a deferred exam. A deferred final exam
will not be approved if a student, excluding the final exam, has completed less than half of the
assigned work (Calendar, §23.5.6, Point 2).

Students with special needs (University Calendar §25.2):

Students with disabilities or special needs that might interfere with their performance should
contact the professor at the beginning of the course with the appropriate documentation. Every
effort will be made to accommodate such students, but in all cases prior arrangements must be
made to ensure that any special needs can be met in a timely fashion and in such a way that the
rest of the class is not put at an unfair disadvantage.

Exam arrangements: SSDS (Specialized Support and Disability Services) and the student, with
the approval of the course instructor, determine exam accommodations. Assessments and/or
documentation of the need for accommodation are required. At the beginning of each term, the
student meets with instructors to review the exam arrangements which will be used. They
provide a “Letter of Introduction” from SSDS verifying the nature of the accommodations
required due to the disability. A few weeks before each exam, the student completes an “Exam
Schedule” form, for SSDS, outlining scheduled exam dates, times, etc. At least one week before
the exam the student then takes an “Exam Instructions and Authorization” form to the
instructor. The instructor is asked to complete the form and enclose it with the exam and
arrange to have it delivered or mailed to SSDS. In administering exams, SSDS follows
university protocol and only makes accommodations as required due to the disability. Exams
are usually set to overlap with the time the professor has set the in-class exams.

Learning and working environment

The Faculty of Arts is committed to ensuring that all students, faculty and staff are able to work
and study in an environment that is safe and free from discrimination and harassment. It does
not tolerate behaviour that undermines that environment. The department urges anyone who
feels that this policy is being violated to:
• Discuss the matter with the person whose behaviour is causing concern; or
• If that discussion is unsatisfactory, or there is concern that direct discussion is
inappropriate or threatening, discuss it with the Chair of the Department.

For additional advice or assistance regarding this policy you may contact the student
ombudservice: (http://www.ombudservice.ualberta.ca/). Information about the University of
Alberta Discrimination and Harassment Policy and Procedures can be found in the GFC Policy
Manual, section 44 available at http://gfcpolicymanual.ualberta.ca/.

Please read the following notes

“Policy about course outlines can be found in Section 23.4(2) of the University Calendar.”

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“The University of Alberta is committed to the highest standards of academic integrity and
honesty. Students are expected to be familiar with these standards regarding academic honesty
and to uphold the policies of the University in this respect. Students are particularly urged to
familiarize themselves with the provisions of the Code of Student Behaviour (online at
http://www.governance.ualberta.ca/en/CodesofConductandResidenceCommunityStandar
ds/CodeofStudentBehaviour.aspx) and avoid any behaviour which could potentially result in
the suspicions of cheating, plagiarism, misrepresentation of facts and/or participation in an
offence. Academic dishonesty is a serious offence and can result in suspension or expulsion
from the University.”

Detailed outline and suggested readings

1. Public goods (A& F, ch. 9): efficient provision, voluntary provision, mechanism design
under asymmetric information
• A. Atkinson, and N. Stern. "Pigou, Taxation and Public Goods." Review of
Economic Studies 41, 1974, pp. 119-128.
• M. King. "A Pigouvian Rule for the Optimal Provision of Public Goods." Journal of
Public Economics 30, 1986, pp. 273-292.
• T. Bergstrom, L. Blume, and H. Varian. "On the Private Provision of Public
Goods." Journal of Public Economics 29, 1986, pp. 25-49.
• B. Kingma. "An Accurate Measurement of the Crowd-Out Effect, Income Effect,
and Price Effect for Charitable Contributions." Journal of Political Economy 97,
October 1989, pp. 1197-1207.

2. Social Security (A & F, ch. 32): theory, impact on private savings and labor supply
• G. Akerlof. “The Market for Lemons.” Quarterly Journal of Economics 85, 1970,
pp. 488-500.
• S. Shavell. “On Moral Hazard and Insurance.” Quarterly Journal of Economics 93,
1979, pp. 541-562.
• P. Diamond. “A Framework for Social Security Analysis.” Journal of Public
Economics 8, 1977, pp. 275-298.
• J. Banks, R. Blundell, and S. Tanner. “Is There a Retirement Savings Puzzle?”
American Economic Review 88, 1998, pp. 769-788.
• D. Bernheim. “How Strong are Bequest Motives? Evidence Based on Estimates of
the Demand for Life Insurance and Annuities.” Journal of Political Economy 93,
December 1985, pp. 1045-1076.
• D. Bernheim, J. Skinner, and S. Weinberg. “What Accounts for the Variation in
Retirement Wealth Among U.S. Households?” American Economic Review 91,
2001, pp. 832-857.
• M. Baker, and D. Benjamin . “How do Retirement Tests Affect the Labor Supply of
Older Men?” Journal of Public Economics 72, 1999, pp. 27-51.
• G. Burtless. “Social Security, Unanticipated Benefit Increases, and the Timing of
Retirement.” Review of Economic Studies. 1986, pp. 781-805.

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3. Unemployment insurance (A&F, ch. 33): theory, impact on worker behavior
• K. Burdett, and R. Wright. “Unemployment Insurance and Short Time
Compensation: The Effects of Layoffs, Hours per Worker, and Wages.” Journal of
Political Economy 97, 1989, pp. 1479-1496.
• Hopenhayn, Hugo A., and Juan Pablo Nicolini. “Optimal Unemployment
Insurance.” Journal of Political Economy 105, 2, April 1997, pp.412-38.
• S. Shavell, and L. Weiss. “The Optimal Payment of Unemployment Insurance
Benefits over Time.” Journal of Political Economy 87, 1979, pp.1347-1362.
• P. Anderson, and B. Meyer. “Unemployment Insurance Takeup Rates and the After-
Tax Value of Benefits.” Quarterly Journal of Economics 112. August, 1997, pp.
913-938.
• R. Blank, and D. Card. “Recent Trends in Insured and Uninsured Unemployment: Is
There an Explanation?” Quarterly Journal of Economics 106. November 1991, pp.
1157-1190.
• R. Ehrenberg, and R. Oaxaca. “Unemployment Insurance, Duration of
Unemployment, and Subsequent Wage Gain.” American Economic Review 66,
December 1976, pp. 754-766.
• B. Meyer. “Lessons from the U.S. Unemployment Insurance Experiments.” Journal
of Economic Literature 33, March 1995, pp. 91-131.
• S. Woodbury, and R. Spiegelman, “Bonuses to Workers and Employers to Reduce
Unemployment: Randomized Trials in Illinois.” American Economic Review 77,
1987, pp. 513-530.

4. Welfare (A & F, ch. 34): facts, impact of cash and in-kind transfers
• G. Burtless. “The Economist's Lament: Public Assistance in America.” Journal of
Economic Perspectives 4, Winter 1990, pp. 57-78.
• D. Slesnick. “Gaining Ground: Poverty in the Postwar United States.” Journal of
Political Economy 101, February 1993, pp. 1-8.
• J. Currie, and N. Cole. “Welfare and Child Health: The Link Between AFDC
Participation and Birth Weight.” American Economic Review 83, September 1993,
pp. 971-985.
• R. Moffitt, “Incentive Effects of the U.S. Welfare System: A Review.” Journal of
Economic Literature 30, March 1992, pp. 1-61.
• J. Currie, and D. Thomas. “Does Head Start Make a Difference?” American
Economic Review 85, June 1995, pp. 341-364.
• J. Currie, and A. Yelowitz. “Is Public Housing Good for Kids?” NBER Working
Paper 6305, December 1997.
• N. Eissa, and J. Liebman. “Labor Supply Response to the Earned Income Tax
Credit.” Quarterly Journal of Economics 106, May 1996, pp. 605-637.

5. Health insurance (A & F, ch. 31): government intervention, impact on the labor market
• K. Arrow. “Uncertainty and the Welfare Economics of Medical Care.” American
Economic Review 53, 1963, pp. 941-973.
• P. Diamond. “Organizing the Health Insurance Market.” Econometrica 60,
November 1992, pp. 1233-1254.
• J. Newhouse. “Medical Care Costs: How Much Welfare Loss?” Journal of
Economic Perspectives 6, Summer 1992, pp. 3-21.

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 • J. Gruber., and J. Poterba. “Taxation and the Demand for Health Insurance: The
Case of the Self-Employed.” Quarterly Journal of Economics 109, 1994, pp. 701-
733.
• W. Manning, et al. “Health Insurance and the Demand for Medical Care: Evidence
from a Randomized Experiment.” American Economic Review 77, June 1987, pp.
251-277.
• J. Gruber. “The Incidence of Mandated Maternity Benefits.” American Economic
Review 84, June 1994, pp. 622-641.
• J. Gruber, and B. Madrian. “Health Insurance Availability and the Retirement
Decision.” American Economic Review 85, September 1995, pp. 938-948.
• J. Gruber, and B. Madrian. “Employment Separation and Health Insurance
Coverage.” Journal of Public Economics 66(3), December 1997, pp. 349-382.
• B. Madrian. “Employment-Based Health Insurance and Job Mobility: Is There
Evidence of Job Lock?” Quarterly Journal of Economics 109, February 1994, pp.
27-54.

6. Education (A&F, ch. 30): public involvement in basic and higher education

• J. Angrist, and A. Krueger. “Does Compulsory School Attendance Affect Schooling

and Earnings?” Quarterly Journal of Economics 106, November 1991, pp. 979-
1014.
• J. Angrist, and V. Lavy. “Using Maimonides' Rule to Estimate the Effect of Class
Size on Children's Academic Achievement.” Quarterly Journal of Economics,114,
1999, pp. 533-575.
• D. Card, and A. Krueger. “Does School Quality Matter? Returns to Education and
the Characteristics of Public Schools in the United States.” Journal of Political
Economy 100, February 1992, pp.1-40.
• E. Duflo. “Schooling and Labor Market Consequences of School Construction in
Indonesia: Evidence from an Unusual Policy Experiment.” American Economic
Review 91, 2001, pp. 795-813.
• D. Epple, and R. Romano. “Competition Between Private and Public Schools,
Vouchers, and Peer Group Effects.” American Economic Review 88, March 1998,
pp. 33-62.
• E Hanushek. “Measuring Investment in Education.” Journal of Economic
Perspectives 10, Fall 1996, pp. 9-30.
• C. Hoxby. “Does Competition Between Public Schools Benefit Students and
Taxpayers?” American Economic Review 90, 2000, pp. 1209-1238.
• C. Hoxby. “How Teachers' Unions Affect Education Production.” Quarterly
Journal of Economics 111, August 1996, pp. 671-718.
• P. Ganderton. “The Effect of Subsidies in Kind on the Choice of a College.”
Journal of Public Economics 48, August 1992, pp. 269-292.
• X. Su. “The Allocation of Public Funds in a Hierarchical Educational System.”
Journal of Economic Dynamics and Control 28, 2004, pp. 2485-2510.