The study has been supported by the German Research Foundation (DFG FOR 1041; EI 199/3-2). There are no conflict of interests.

While existing research has suggested that delegating foreign aid allocation decisions to a multilateral aid fund may incentivize recipient countries to invest in bureaucratic quality, our analysis links the fund’s decision rules to recipient-country investment by explicitly modeling the decision-making within multilateral aid funds. We find that majority rule induces stronger competition between recipients, resulting in higher investments in bureaucratic quality. Despite this advantage, unanimity can still be optimal since the increased investment under majority comes at the cost of low aid allocation to countries in the minority. The qualitative predictions of our model rationalize our novel empirical finding that, relative to organizations that use a consensus rule, organizations that use majority are more responsive to changes in recipient-country quality.

We study fiscal spending by supranational unions, where participation is voluntary and countries bargain over contributions to and the allocation of a central budget. Since decisions are made by unanimity, bargaining power over the allocation becomes a function of contributions, which generically causes inefficiency in the presence of income asymmetry between member nations. This link between the budget allocation and contributions explains patterns of inefficient spending in the EU, e.g. why resources are diverted to low-productivity projects in high-income countries: the option of veto creates a trade-off between efficiency on the contributions margin and efficiency on the allocation margin.

No abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Optimal Debt Bias in Corporate Income Taxation Abstract I present a rationale for a government to discriminate between debt and equity financing when taxing corporate income. For risk-averse entrepreneurs, equity generates more surplus than debt, because it provides financing and insurance. A government seeking to extract surplus from entrepreneurs would naturally tax equity-generated income more than debt-generated income. I also establish a less obvious reason why the government might want to extract surplus from entrepreneurs. It is well understood that when the quality of projects is unobservable to investors, risk-averse entrepreneurs with higher-return projects might retain a larger share of equity to signal their type (Leland and Pyle (1977)). I show that in such an adverse selection setting, while competitive investors are constrained to offer actuarially fair terms, the government can use taxes to discriminate between types. This degree of freedom allows manipulation of the relevant incentive constraints so that a lower level of debt suffices for separation, and an increase in overall efficiency can be obtained. Since entrepreneurs separate along their debt-toequity ratios, the optimal non-linear tax schedule to achieve the desired discrimination is isomorphic to one that taxes debt-generated income at a lower rate than equity-generated income. Terms of use: Documents inJEL-Code: G180, G110, H250, D820.