Advanced Search
MyIDEAS: Login to save this paper or follow this series

A Dynamic Theory of Public Spending, Taxation and Debt

Contents:

Author Info

  • Marco Battaglini
  • Stephen Coate

Abstract

This paper presents a dynamic political economy theory of public spending, taxation and debt. Policy choices are made by a legislature consisting of representatives elected by geographically-defined districts. The legislature can raise revenues via a distortionary income tax and by borrowing. These revenues can be used to finance a national public good and district-specific transfers (interpreted as pork-barrel spending). The value of the public good is stochastic, reflecting shocks such as wars or natural disasters. In equilibrium, policy-making cycles between two distinct regimes: “business-as-usual” in which legislators bargain over the allocation of pork, and “responsible-policy-making” in which policies maximize the collective good. Transitions between the two regimes are brought about by shocks in the value of the public good. In the long run, equilibrium tax rates are too high and too volatile, public good provision is too low, and debt levels are too high. In some environments, a balanced budget requirement can improve citizen welfare.

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.najecon.org/v13.htm
File Function: brief review and links to paper
Download Restriction: no

Bibliographic Info

Paper provided by www.najecon.org in its series NajEcon Working Paper Reviews with number 321307000000000026.

as in new window
Length:
Date of creation: 11 May 2006
Date of revision:
Handle: RePEc:cla:najeco:321307000000000026

Contact details of provider:
Web page: http://www.najecon.org/

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. G Frechette & J Kagel & M Morelli, 2004. "Behavioral Identification in Coalition Bargaining: An Experimental Analysis of Demand Bargaining and Alternating Offers," Levine's Bibliography 122247000000000006, UCLA Department of Economics.
  2. Stephen Coate & Stephen Morris, . "Policy Persistence," CARESS Working Papres, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences 97-2, University of Pennsylvania Center for Analytic Research and Economics in the Social Sciences.
  3. Alberto Alesina & Filipe R. Campante & Guido Tabellini, 2008. "Why is Fiscal Policy Often Procyclical?," Journal of the European Economic Association, MIT Press, MIT Press, vol. 6(5), pages 1006-1036, 09.
  4. V.V. Chari & Harold Cole, 1993. "Why are representative democracies fiscally irresponsible?," Staff Report, Federal Reserve Bank of Minneapolis 163, Federal Reserve Bank of Minneapolis.
  5. Bohn, Henning & Inman, Robert P., 1996. "Balanced-budget rules and public deficits: evidence from the U.S. states," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 45(1), pages 13-76, December.
  6. Perotti, Roberto & Kontopoulos, Yianos, 2002. "Fragmented fiscal policy," Journal of Public Economics, Elsevier, Elsevier, vol. 86(2), pages 191-222, November.
  7. Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2006. "Markets Versus Governments: Political Economy of Mechanisms," NBER Working Papers 12224, National Bureau of Economic Research, Inc.
  8. Lizzeri, Alessandro, 1999. "Budget Deficits and Redistributive Politics," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 66(4), pages 909-28, October.
  9. V.V. Chari & Harold Cole, 1993. "A contribution to the theory of pork barrel spending," Staff Report, Federal Reserve Bank of Minneapolis 156, Federal Reserve Bank of Minneapolis.
  10. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, Elsevier, vol. 33(5), pages 903-933, May.
  11. Brennan,Geoffrey & Buchanan,James M., 2006. "The Power to Tax," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521027922.
  12. Thomas J. Sargent & Marco Bassetto, 2004. "Politics and Efficiency of Separating Capital and Ordinary Government Budgets," 2004 Meeting Papers, Society for Economic Dynamics 3, Society for Economic Dynamics.
  13. Velasco, Andres, 2000. "Debts and deficits with fragmented fiscal policymaking," Journal of Public Economics, Elsevier, Elsevier, vol. 76(1), pages 105-125, April.
  14. Stephen Morris & George J Mailath, 2005. "Coordination Failure in Repeated Games with Almost-Public Monitoring," 2005 Meeting Papers, Society for Economic Dynamics 25, Society for Economic Dynamics.
  15. Tabellini, Guido & Alesina, Alberto, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Scholarly Articles 3612769, Harvard University Department of Economics.
  16. Neyman, Abraham & Okada, Daijiro, 2000. "Repeated Games with Bounded Entropy," Games and Economic Behavior, Elsevier, Elsevier, vol. 30(2), pages 228-247, February.
  17. Kalai, Ehud & Stanford, William, 1988. "Finite Rationality and Interpersonal Complexity in Repeated Games," Econometrica, Econometric Society, Econometric Society, vol. 56(2), pages 397-410, March.
  18. Hassler, John & Mora, Jose & Storesletten, Kjetil & Zilibotti, Fabrizio, 2002. "The Survival of the Welfare State," Seminar Papers, Stockholm University, Institute for International Economic Studies 704, Stockholm University, Institute for International Economic Studies.
  19. Torsten Persson & Guido Tabellini, 1997. "Political Economics and Macroeconomic Policy," NBER Working Papers 6329, National Bureau of Economic Research, Inc.
  20. Henning Bohn, 1998. "The Behavior Of U.S. Public Debt And Deficits," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(3), pages 949-963, August.
  21. Poterba, James M., 1995. "Balanced Budget Rules and Fiscal Policy: Evidence From the States," National Tax Journal, National Tax Association, vol. 48(3), pages 329-36, September.
  22. International Monetary Fund, 1996. "Budget Processes and Commitment to Fiscal Discipline," IMF Working Papers 96/78, International Monetary Fund.
  23. Jeffrey C. Ely & Juuso Valimaki, 1999. "A Robust Folk Theorem for the Prisoner's Dilemma," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 1264, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  24. Giancarlo Corsetti & Nouriel Roubini, 1995. "Politically Motivated Fiscal Deficits: Policy Issues in Closed and Open Economies," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 95-21, New York University, Leonard N. Stern School of Business, Department of Economics.
  25. Weingast, Barry R & Shepsle, Kenneth A & Johnsen, Christopher, 1981. "The Political Economy of Benefits and Costs: A Neoclassical Approach to Distributive Politics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(4), pages 642-64, August.
  26. Gossner, Olivier & Vieille, Nicolas, 2002. "How to play with a biased coin?," Games and Economic Behavior, Elsevier, Elsevier, vol. 41(2), pages 206-226, November.
  27. George J. Mailath & Stephen Morris, 2000. "Repeated Games with Almost-Public Monitoring," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 0661, Econometric Society.
  28. Besley, Timothy & Smart, Michael, 2007. "Fiscal restraints and voter welfare," Journal of Public Economics, Elsevier, Elsevier, vol. 91(3-4), pages 755-773, April.
  29. Fudenberg, Drew & Maskin, Eric, 1986. "The Folk Theorem in Repeated Games with Discounting or with Incomplete Information," Econometrica, Econometric Society, Econometric Society, vol. 54(3), pages 533-54, May.
  30. GOSSNER, Olivier & HERNANDEZ, Pénélope, 2001. "On the complexity of coordination," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2001047, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  31. Marco Battaglini & Stephen Coate, 2005. "Inefficiency in Legislative Policy-Making: A Dynamic Analysis," NBER Working Papers 11495, National Bureau of Economic Research, Inc.
  32. Drew Fudenberg & David K. Levine & Eric Maskin, 1994. "The Folk Theorem with Imperfect Public Information," Levine's Working Paper Archive 394, David K. Levine.
  33. Johannes Hörner & Wojciech Olszewski, 2006. "The Folk Theorem for Games with Private Almost-Perfect Monitoring," Econometrica, Econometric Society, Econometric Society, vol. 74(6), pages 1499-1544, November.
  34. von Stengel, Bernhard & Koller, Daphne, 1997. "Team-Maxmin Equilibria," Games and Economic Behavior, Elsevier, Elsevier, vol. 21(1-2), pages 309-321, October.
  35. Moreno, Diego & Wooders, John, 1998. "An Experimental Study of Communication and Coordination in Noncooperative Games," Games and Economic Behavior, Elsevier, Elsevier, vol. 24(1-2), pages 47-76, July.
  36. Besley, Timothy & Coate, Stephen, 1998. "Sources of Inefficiency in a Representative Democracy: A Dynamic Analysis," American Economic Review, American Economic Association, American Economic Association, vol. 88(1), pages 139-56, March.
  37. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 87(5), pages 940-71, October.
  38. Barro, Robert J., 1987. "Government spending, interest rates, prices, and budget deficits in the United Kingdom, 1701-1918," Journal of Monetary Economics, Elsevier, Elsevier, vol. 20(2), pages 221-247, September.
  39. S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002. "Optimal Taxation without State-Contingent Debt," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 110(6), pages 1220-1254, December.
  40. James M. Poterba & Jürgen von Hagen, 1999. "Fiscal Institutions and Fiscal Performance," NBER Books, National Bureau of Economic Research, Inc, number pote99-1.
  41. Henning Bohn & Robert P. Inman, . "Balanced Budget Rules and Public Deficits: Evidence from the U.S. States (Reprint 060)," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 10-96, Wharton School Rodney L. White Center for Financial Research.
  42. Kandori, Michihiro, 2002. "Introduction to Repeated Games with Private Monitoring," Journal of Economic Theory, Elsevier, Elsevier, vol. 102(1), pages 1-15, January.
  43. Friedman, James W, 1971. "A Non-cooperative Equilibrium for Supergames," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(113), pages 1-12, January.
  44. Daron Acemoglu, 2002. "Why Not a Political Coase Theorem? Social Conflict, Commitment and Politics," NBER Working Papers 9377, National Bureau of Economic Research, Inc.
  45. Inman, Robert P, 1990. "Public Debts and Fiscal Politics: How to Decide?," American Economic Review, American Economic Association, American Economic Association, vol. 80(2), pages 81-85, May.
  46. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(1), pages 55-93.
  47. Lehrer, E, 1990. "Nash Equilibria of n-Player Repeated Games with Semi-standard Information," International Journal of Game Theory, Springer, Springer, vol. 19(2), pages 191-217.
  48. V. Bhaskar & Ichiro Obara, 2000. "Belief-Based Equilibria in the Repeated Prisoners' Dilemma with Private Monitoring," Econometric Society World Congress 2000 Contributed Papers, Econometric Society 1330, Econometric Society.
  49. Sekiguchi, Tadashi, 1997. "Efficiency in Repeated Prisoner's Dilemma with Private Monitoring," Journal of Economic Theory, Elsevier, Elsevier, vol. 76(2), pages 345-361, October.
  50. Alberto Alesina, 2000. "The Political Economy of the Budget Surplus in the United States," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 14(3), pages 3-19, Summer.
  51. William A. Niskanen, 1992. "The Case for a New Fiscal Constitution," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 6(2), pages 13-24, Spring.
  52. Poterba, James M, 1994. "State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 102(4), pages 799-821, August.
  53. Leblanc, William & Snyder, James Jr. & Tripathi, Micky, 2000. "Majority-rule bargaining and the under provision of public investment goods," Journal of Public Economics, Elsevier, Elsevier, vol. 75(1), pages 21-47, January.
  54. Volkerink, Bjorn & De Haan, Jakob, 2001. " Fragmented Government Effects on Fiscal Policy: New Evidence," Public Choice, Springer, Springer, vol. 109(3-4), pages 221-42, December.
  55. Neyman, Abraham & Okada, Daijiro, 1999. "Strategic Entropy and Complexity in Repeated Games," Games and Economic Behavior, Elsevier, Elsevier, vol. 29(1-2), pages 191-223, October.
  56. Alberto Alesina & Roberto Perotti, 1994. "The Political Economy of Budget Deficits," NBER Working Papers 4637, National Bureau of Economic Research, Inc.
  57. repec:rus:hseeco:72153 is not listed on IDEAS
  58. Robert J. Aumann & Lloyd S. Shapley, 1992. "Long Term Competition-A Game Theoretic Analysis," UCLA Economics Working Papers, UCLA Department of Economics 676, UCLA Department of Economics.
  59. Baron David & Kalai Ehud, 1993. "The Simplest Equilibrium of a Majority-Rule Division Game," Journal of Economic Theory, Elsevier, Elsevier, vol. 61(2), pages 290-301, December.
  60. Barro, Robert J, 1986. " U.S. Deficits since World War I," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 88(1), pages 195-22.
  61. George-Marios Angeletos, 2002. "Fiscal Policy With Noncontingent Debt And The Optimal Maturity Structure," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 117(3), pages 1105-1131, August.
  62. Piccione, Michele, 2002. "The Repeated Prisoner's Dilemma with Imperfect Private Monitoring," Journal of Economic Theory, Elsevier, Elsevier, vol. 102(1), pages 70-83, January.
Full references (including those not matched with items on IDEAS)

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Pork-barrel cycles
    by Economic Logician in Economic Logic on 2009-03-28 01:51:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is featured on the following reading lists or Wikipedia pages:
  1. Economic Logic blog

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:cla:najeco:321307000000000026. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (David K. Levine).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.