Vol. 1 No. 1

Mika Kortelainen and Janne Tukiainen: Foreword: Journal of Finnish Economic Association 1/2020

Gilles Saint-Paul: From Microeconomic Favoritism to Macroeconomic Populism


Why would people support policies that are macroeconomically unsound, in that they are more likely to lead to such events as sovereign crises, balance of payments crises, and the like? This may arise if decisive voters are likely to bear a lower fraction of the costs of the crisis, while benefitting from the short-run gains associated with those policies, such as greater public expenditure or lower taxes.

I first discuss an illustrative model based on Saint-Paul et al. (2017), based on the assumption that in a crisis, not everybody can access his or her entitlement to publicly provided goods, a feature labelled “favoritism”. If the decisive voter is relatively favored in this rationing process, then people are more likely to finance public expenditure by debt, thegreater the degree of favoritism. Furthermore, favoritism and the likelihood of a crisis raises the level of public spending.

Next, I consider the choice between electing a “populist” who reneges on anonymity when allocating the public good, even in normal times, and a “technocrat” who sticks to anonymity, and does all it takes to balance the budget. I show that the support for the populist is greater, (i) the greater the likelihood of default, (ii) the more depressed the macroeconomic environment, (iii) the greater the inherited level of public debt and (iv) the lower the state’s fiscal capacity.

I then argue that the model helps understanding some episodes in French pension reform. Some occupational groups supported unsustainable reductions in the retirement age because they expected that other workers would bear a higher proportion of the burden of future adjustment.

Finally, using a panel of countries, I provide evidence in favor of some of the predictions of the model. As predicted, favoritism raises public debt, budget deficits, and public spending. It also raises the likelihood of a fiscal crisis through its effect on public debt. Furthermore, “populists” are more likely to conquer power, the higher the degree of debt and budget deficits, and the higher the level of government spending – the latter finding being consistent with the model’s prediction on the effect of fiscal capacity.

Keywords: political economy, fiscal crises, favoritism, entitlements, public debt, inequality, state capacity

JEL Classification: E620, F340, H120, H600, O110, P160

Helena Holmlund: A researcher’s guide to the Swedish compulsory school reform*


This paper demonstrates how a natural experiment in education can be used to estimate causal effects. The Swedish compulsory school reform extended basic education gradually across cohorts and municipalities, allowing for a differencein-differences analysis. The paper summarizes the literature using this reform and shows that it provided individuals from low socio-economic backgrounds with better opportunities in life. Not only did they attain higher levels of education –they also earned higher earnings, were less likely to participate in crime, and more likely to run for office.

JEL-codes: I24; I26; I28

John Hassler: A global CO2 price – Necessary and sufficient


During the last 10 years, I have spent most of my research time on the economics of climate change. Basically all of it has been done together with my colleagues Per Krusell at IIES and Conny Olovsson at Sveriges Riksbank. Being a truly crossdisciplinary field, the close interaction with many natural scientists, in particular Jonas Nycander at the department of meteorology at Stockholm University has been an absolute necessity. In this article, based on a talk at the Finnish Economic Association annual conference in February 2020, I summarize what we have learned over the years. Hopefully it can be of value to other researchers and policy makers. In any case, I am convinced that economics is key for understanding what to do about global warming. The key conclusion is that a global agreement on a (minimum) price on fossil carbon emission is necessary, sufficient and efficient solution to limiting climate change.

Jacob Lundberg and John Norell: Taxes, benefits and labour force participation: A survey of the quasi-experimental literature


We review the literature that uses quasi-experimental methods to estimate the elasticity of labour force participation with respect to the financial gain from work. We find a wide range of elasticities, with an average of 0.36. 27 out of 35 papers find elasticities larger than 0.1, providing strong evidence that individuals respond to incentives on the extensive margin of labour supply. Elasticities are larger for women, and have declined over time.

Keywords: participation elasticity, quasi-experimental methods, labour supply, extensive margin

JEL codes: H24, J22

Tuomas Takalo: Switching Costs in the Finnish Retail Deposit Market*


I calibrate the switching cost for the Finnish retail deposit market by using the approach developed by Oz Shy (2002). It turns out that switching costs faced by deposit customers of the main Finnish banks manifest large variation and are high, ranging from 200 euros to nearly 1,400 euros. Over a 20-year period, switching costs have increased by roughly 50% in real terms, but in relation to average account balance, switching costs have not essentially changed. Changes and differences in the banks’ competitive strategies might explain the variation in switching costs across time and banks..

JEL Classification: G21,L13,L49.

Journal of Finnish Economic Association 1/2020

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