By Nora Ottenhof, JDI undergraduate research assistant

The 2017 Canadian Public Economic Group Meeting (CPEG2017) will take place on the Queen’s University campus in Kingston on November 2 – 4. This year’s meetings are being hosted by the John Deutsch Institute (JDI) and the Department of Economics. “We are very excited for the conference, which will feature presentations by some of the leading public economists in Canada,” said Dr. Christopher Cotton, the conference organizer and the Director of the JDI.

For more information on the conference, see the CPEG website.

Here, I review a handful of the papers that will be presented and discussed during this year’s conference.

Reelection and Renegotiation: The Political Economy of International Agreements, by Peter Buisseret and Dan Bernhardt 

In their paper, Peter Buisseret and Dan Bernhardt delve into the intricacies of international agreements when one of the negotiating parties is under threat of electoral replacement at home. One need not search hard for examples of electoral turnover impacting the commitment of international agreements. The United States’ withdrawal from the Kyoto Protocol and the Paris Climate Agreement following respective electoral shifts from Democratic to Republican control, the United Kingdom’s entry and subsequent departure from the European Union, and Greece’s exit from the European Monetary Union are just some of the more recent cases of political change triggering the abolition of multinational accords.

With differing partisan priorities, some degree of change is to be expected. The question Buisseret and Bernhardt pose is “How do the prospects for initial cooperation and the terms of agreements vary with uncertainty about whether one of the negotiating parties will subsequently be replaced by an agent with different preferences?” Additionally, they ask “How do the terms of an initial agreement affect the prospect of electoral replacement, the bargaining attitude of a potential successor, or the risk that a successor will ultimately walk away from the agreement?”

They show that in scenarios where election outcomes are insensitive to bargaining outcomes, uncertainty about future electoral results plays no role in the prospects for the initial agreement. Conversely, when voters’ electoral decisions are sensitive to bargaining outcomes, negotiations are driven by a three-way conflict of interest between the negotiating parties, both foreign and domestic, as well as the domestic electorate. The success of negotiations depends on the degree of conflict of interest between parties, and the potential gains in surplus that are possible via cooperation. Buisseret and Bernhardt effectively highlight the close relationship between policy, politics, and international relations and provided a solid framework for risk management in multinational negotiations that can be applied in numerous settings outside of politics, namely, trade union bargaining.

Demand for Long-term Care Insurance in Canada, by Martin Boyer, Philippe De Donder, Claude Fluet, Marie-Louise Leroux, and Pierre-Carl Michaud

This paper explores survey evidence on the demand for various insurance products aimed at protecting purchasers from the financial costs associated with the need for long-term health care as well as the public understanding of how these products function in Canada. Overall, the take-up rate for Long Term Care Insurance products in Canada is quite low at approximately 12%. Adverse selection and demand side factors such as expectation biases, preference for family care, and bequest motivations all boost demand for Long Term Care Insurance (LTCI) and theoretically should have pushed the take-up rate to well over 40%.

So why is there a discrepancy between demand and take up rates? One strong reason is said to be the fact that LTCI products are not made available to those with the highest demand, the elderly or those with pre-existing conditions. For example, “Among the 88% of people from our sample who did not buy Long Term Care Insurance, 44% declared they had never been offered one.” Additionally, a severe lack of understanding of how the system for LTCI functions amongst Canadians is thought to be a major deterrent for many potential purchasers. These findings highlight the need to reexamine the market for health insurance in Canada. With a rapidly aging population and cuts to health care running rampant in numerous provinces, it is clear more needs to be done to satisfy the demand for LTCI moving forward. We are excited to hear more about potential market-based approaches to this issue along with further applications of the findings.

The Price May Actually be Right, by Steeve Mongrain, David Oh, and Tanguy Van Ypersele

In contrast to a popular 2016 article published by The Economist entitled The Price Isn’t Right, highlighting the immense fiscal cost of profit shifting practices by multinational firms, this paper explores the potential financial benefits of profit shifting. Previous studies had explored this idea under specific conditions such as in regions with both mobile and immobile tax bases that cannot be differentiated by the tax authority or under the single country assumption where competition between hosting countries is not highlighted. Mongrain, Oh, and Van Ypersele on the other hand fully take into account factors such as firm location preferences, government decision making, and asymmetric equilibrium taxation rates, so as to gain a clearer sense of the potential costs and benefits of profit shifting under real world conditions. Their work yielded some interesting results and highlighted the importance of two tax bases, in particular, firms’ location tax base; where the firm is formally based out of, and per-firm retained profit tax base; the location the firm claims it has made its profits. Relaxing the degree of profit shifting enforcement, they found, shifts the weight from the per firm retained profit tax base to the firms’ location tax base. As a result of the said shift, choosing more lenient profit shifting controls may allow high tax regions to choose a higher tax rate while simultaneously reducing the equilibrium tax gap between the high and low tax regions, thus increasing the rate of taxation on aggregate. This is a result of the finding that regions with higher taxes tend to be more sensitive to profit shifting controls. Mongrain, Oh, and Van Ypersele have brought a new perspective to a practice formerly frowned upon by the vast majority of governments. We look forward to further discourse on this topic including potential applications for governments and firms alike.