Interest groups or incentives: the political economy of fiscal decay
AbstractOne view is that concessions demanded by and granted to interests groups are responsible for steady fiscal decline, and delay in reforms. We argue that negative supply shocks combined with the political objective of protecting the poor can build in incentives leading to these results. Pricing rules for government services, generated in such circumstances, would be equivalent to a fixed price contract that left the government with negative rent. A decline in investment in and quality of government services would follow, since price controls in the presence of cost shocks would lead to systematic incentives to lower quality and investment. Tax capacity and the ability to reduce poverty in the future would fall. The framework helps to understand the Indian experience. Time series based tests of causality support the causal priority of positive cost shocks. If it is accepted that incentives, and not only interest groups are responsible for fiscal decay, a concerted attempt to rationalize user charges and improve quality may be politically feasible.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 29198.
Date of creation: 2004
Date of revision:
Cost shocks; user charges; political economy; cross-subsidization; interest groups; fiscal decay; incentives;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- O11 - Economic Development, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
- E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy
- P16 - Economic Systems - - Capitalist Systems - - - Political Economy of Capitalism
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