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Fiscal Restraints and Voter Welfare

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  • Timothy Besley
  • Michael Smart

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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Paper provided by Suntory and Toyota International Centres for Economics and Related Disciplines, LSE in its series STICERD - Political Economy and Public Policy Paper Series with number 06.

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Date of creation: Jul 2005
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Handle: RePEc:cep:stipep:06

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Web page: http://sticerd.lse.ac.uk/_new/publications/default.asp

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  1. 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.
  2. 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.
  3. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
  4. Laffont, Jean-Jacques, 2000. "Incentives and Political Economy," OUP Catalogue, Oxford University Press, number 9780198294245.
  5. Paul Belleflamme & Jean Hindriks, 2001. "Yardstick Competition and Political Agency Problems," Working Papers 441, Queen Mary, University of London, School of Economics and Finance.
  6. Andrea Prat, 2002. "The wrong kind of transparency," LSE Research Online Documents on Economics 3679, London School of Economics and Political Science, LSE Library.
  7. 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.
  8. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
  9. James Buchanan & Roger Congleton, 1979. "Proportional and progressive income taxation with utility-maximizing governments," Public Choice, Springer, vol. 34(2), pages 217-230, June.
  10. 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.
  11. Peltzman, Sam, 1980. "The Growth of Government," Journal of Law and Economics, University of Chicago Press, vol. 23(2), pages 209-87, October.
  12. Robert Barro, 1973. "The control of politicians: An economic model," Public Choice, Springer, vol. 14(1), pages 19-42, March.
  13. 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.
  14. 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.
  15. 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.
  16. Peltzman, Sam, 1992. "Voters as Fiscal Conservatives," The Quarterly Journal of Economics, MIT Press, vol. 107(2), pages 327-61, May.
  17. 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.
  18. Edwards, Jeremy & Keen, Michael, 1996. "Tax competition and Leviathan," European Economic Review, Elsevier, vol. 40(1), pages 113-134, January.
  19. John Ferejohn, 1986. "Incumbent performance and electoral control," Public Choice, Springer, vol. 50(1), pages 5-25, January.
  20. North, Douglass C., 1985. "The growth of government in the United States: An economic historian's perspective," Journal of Public Economics, Elsevier, vol. 28(3), pages 383-399, December.
  21. John Douglas Wilson, 1989. "An Optimal Tax Treatment Of Leviathan," Economics and Politics, Wiley Blackwell, vol. 1(2), pages 97-117, 07.
  22. James E. Alt & David Dreyer Lassen, 2003. "Fiscal Transparency and Fiscal Policy Outcomes in OECD Countries," EPRU Working Paper Series 03-02, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
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