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Abstract

This paper explores the logic of …scal restraints in a political agencymodel with both moral hazard and adverse selection. The role of thepolitical process is both to discipline incumbents who may act againstthe public interest and to sort in those politicians who are most likelyact in voters'interests. We use the model to examine the optimality ofine¢ cient taxation, limits on the size of government, increasing trans-parency, and yardstick competition. Some conclusions are surprising.For example, we show that some forms of …scal restraint can only bedesirable when incumbents are su¢ ciently likely to be benevolent.We are grateful to Jim Hines and a number of seminar participants for insightfulcomments.1

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Public Economics.

Volume (Year): 91 (2007)
Issue (Month): 3-4 (April)
Pages: 755-773

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Handle: RePEc:eee:pubeco:v:91:y:2007:i:3-4:p:755-773

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Web page: http://www.elsevier.com/locate/inca/505578

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Find related papers by JEL classification:

• D02 - Microeconomics - - General - - - Institutions: Design, Formation, and Operations
• D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
• D73 - Microeconomics - - Analysis of Collective Decision-Making - - - Bureaucracy; Administrative Processes in Public Organizations; Corruption
• D8 - Microeconomics - - Information, Knowledge, and Uncertainty
• H1 - Public Economics - - Structure and Scope of Government

References

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1. Besley, Timothy & Case, Anne, 1995. "Incumbent Behavior: Vote-Seeking, Tax-Setting, and Yardstick Competition," American Economic Review, American Economic Association, vol. 85(1), pages 25-45, March.
   
   • Timothy Besley & Anne Case, 1992. "Incumbent Behavior: Vote Seeking, Tax Setting and Yardstick Competition," NBER Working Papers 4041, National Bureau of Economic Research, Inc.
2. Jeremy Edwards & Michael Keen, 1994. "Tax competition and Leviathon," IFS Working Papers W94/07, Institute for Fiscal Studies.
   
   • Edwards, Jeremy & Keen, Michael, 1996. "Tax competition and Leviathan," European Economic Review, Elsevier, vol. 40(1), pages 113-134, January.
3. Prat, Andrea, 2003. "The Wrong Kind of Transparency," CEPR Discussion Papers 3859, C.E.P.R. Discussion Papers.
   
   • Andrea Prat, 2005. "The Wrong Kind of Transparency," American Economic Review, American Economic Association, vol. 95(3), pages 862-877, June.
   • Andrea Prat, 2002. "The Wrong Kind of Transparency," STICERD - Theoretical Economics Paper Series 439, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
4. Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1996. "Are consumption taxes really better than income taxes?," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 475-503, June.
5. Bengt Holmstrom, 1981. "Moral Hazard in Teams," Discussion Papers 471, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
   
   • Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
6. SALMON, Pierre, 1987. "Decentralization as an incentive scheme," Institut des Mathématiques Economiques – Document de travail de l’I.M.E. (1974-1993) 98, Institut des Mathématiques Economiques. LATEC, Laboratoire d'Analyse et des Techniques EConomiques, CNRS, Université de Bourgogne.
   
   • Salmon, Pierre, 1987. "Decentralisation as an Incentive Scheme," Oxford Review of Economic Policy, Oxford University Press, vol. 3(2), pages 24-43, Summer.
7. Paul Belleflamme & Jean Hindriks, 2005. "Yardstick competition and political agency problems," Social Choice and Welfare, Springer, vol. 24(1), pages 155-169, 09.
   
   • Paul Belleflamme & Jean Hindriks, 2001. "Yardstick Competition and Political Agency Problems," Working Papers 441, Queen Mary, University of London, School of Economics and Finance.
   • BELLEFLAMME, Paul & HINDRIKS, Jean, 2002. "Yardstick competition and political agency problems," CORE Discussion Papers 2002029, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
8. Meyer, Margaret A & Vickers, John, 1995. "Performance Comparisons and Dynamic Incentives," CEPR Discussion Papers 1107, C.E.P.R. Discussion Papers.
   
   • Meyer, Margaret A & Vickers, John, 1997. "Performance Comparisons and Dynamic Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 547-81, June.
9. Martin Bodenstein & Heinrich Ursprung, 2005. "Political yardstick competition, economic integration, and constitutional choice in a federation:," Public Choice, Springer, vol. 124(3), pages 329-352, September.
   
   • Martin Bodenstein & Heinrich Ursprung, 2001. "Political Yardstick Competition, Economic Integration, and Constitutional Choice in a Federation," CESifo Working Paper Series 501, CESifo Group Munich.
10. John Douglas Wilson, 1989. "An Optimal Tax Treatment Of Leviathan," Economics and Politics, Wiley Blackwell, vol. 1(2), pages 97-117, 07.
11. Gary S. Becker & Casey B. Mulligan, 1998. "Deadweight Costs and the Size of Government," University of Chicago - George G. Stigler Center for Study of Economy and State 144, Chicago - Center for Study of Economy and State.
    
    • Becker, Gary S & Mulligan, Casey B, 2003. "Deadweight Costs and the Size of Government," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 293-340, October.
    • Gary S. Becker & Casey B. Mulligan, 1998. "Deadweight Costs and the Size of Government," NBER Working Papers 6789, National Bureau of Economic Research, Inc.
12. Peltzman, Sam, 1992. "Voters as Fiscal Conservatives," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 327-61, May.
13. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    
    • Bengt Holmstrom, 1997. "Moral Hazard and Observability," Levine's Working Paper Archive 1205, David K. Levine.
14. Peltzman, Sam, 1980. "The Growth of Government," Journal of Law and Economics, University of Chicago Press, vol. 23(2), pages 209-87, October.
    
    • Sam Peltzman, 1980. "The Growth of Government," University of Chicago - George G. Stigler Center for Study of Economy and State 1, Chicago - Center for Study of Economy and State.
15. Fischer, Stanley & Summers, Lawrence H, 1989. "Should Governments Learn to Live with Inflation?," American Economic Review, American Economic Association, vol. 79(2), pages 382-87, May.
16. Massimo Bordignon & Floriana Cerniglia & Federico Revelli, 2002. "In Search for Yardstick Competition: Property Tax Rates and Electoral Behavior in Italian Cities," CESifo Working Paper Series 644, CESifo Group Munich.
17. Laffont, Jean-Jacques, 2001. "Incentives and Political Economy," OUP Catalogue, Oxford University Press, number 9780199248681, September.
    
    • Laffont, Jean-Jacques, 2000. "Incentives and Political Economy," OUP Catalogue, Oxford University Press, number 9780198294245, September.

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