Government Intervention as an Optimal Response to Government (not Market!) Failure
AbstractThis paper provides a theory of government intervention, such as government ownership, regulation, mandatory public schooling, subsidies, and industrial policy, as an optimal policy response due to the inability to commit not to expropriate private investment or bail agents out. If the government cannot commit not to expropriate the capital of private firms expost, private firms may not invest ex ante. The government may hence need to undertake investment itself. Thus, government ownership may be optimal, and, indeed, may be optimal even if government owned firms are less efficient. Public enterprise as a remedy for lack of private investment due to the threat of expropriation by the government should be particularly important in capital intensive sectors such as manufacturing, extraction of natural resources, and services which require large infrastructure investments, which is consistent with the data. Similarly, if the government bails out households which do not invest in schooling or save for retirement ex post, the government has to enforce universal schooling and force agents to save through social security systems ex ante. Government intervention may thus primarily be a response to government failure rather than market failure
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Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 888.
Date of creation: 03 Dec 2006
Date of revision:
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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
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Public enterprise; time inconsistency; optimal policy;
Find related papers by JEL classification:
- H1 - Public Economics - - Structure and Scope of Government
- H2 - Public Economics - - Taxation, Subsidies, and Revenue
This paper has been announced in the following NEP Reports:
- NEP-ALL-2007-01-13 (All new papers)
- NEP-PBE-2007-01-13 (Public Economics)
- NEP-REG-2007-01-13 (Regulation)
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