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Choosing Size of Government Under Ambiguity: Infrastructure Spending and Income Taxation

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  • Charles F. Manski

Abstract

Attempting to shed light on the optimal size of government, economists have analyzed planning problems that specify a set of feasible taxation-spending policies and a social welfare function. The analysis characterizes the optimal policy choice of a planner who knows the welfare achieved by each policy. This paper examines choice of size of government by a planner who has partial knowledge of population preferences and the productivity of spending. This is a problem of decision making under ambiguity. Focusing on income-tax financed public spending for infrastructure that aims to enhance productivity, I examine scenarios where the planner observes the outcome of a status quo policy and uses various decision criteria (expected welfare, maximin, Hurwicz, minimax-regret) to choose policy. The analysis shows that the planner can reasonably choose a wide range of spending levels—thus, a society can rationalize having a small or large government. I conclude that to achieve credible conclusions about the desirable size of government, we need to vastly improve current knowledge of population preferences and the productivity of public spending.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 18204.

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Date of creation: Jul 2012
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Handle: RePEc:nbr:nberwo:18204

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  1. Charles F. Manski, 2005. "Search Profiling with Partial Knowledge of Deterrence," NBER Working Papers 11848, National Bureau of Economic Research, Inc.
  2. William A. Brock & Charles F. Manski, 2011. "Competitive Lending with Partial Knowledge of Loan Repayment: Some Positive and Normative Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43, pages 441-459, 03.
  3. Charles F. Manski, 2011. "Choosing Treatment Policies Under Ambiguity," Annual Review of Economics, Annual Reviews, vol. 3(1), pages 25-49, 09.
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