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Commitment, Deficit Ceiling, and Fiscal Privilege

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  • Toshihiro Ihori

    (Faculty of Economics, The University of Tokyo)

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    Abstract

       This study analyzes how commitment to a deficit ceiling can affect private agents' political efforts, as well as overall welfare, in a hard and a soft budget regime, using a two-period model simulating a present and a future generation and a government. In the hard budget regime, the government imposes the deficit ceiling before the present-generation's interest group decides the quantity of personal fiscal privileges. Since in the soft budget regime the government cannot commit itself to the deficit ceiling ex ante, the present generation exerts intense political efforts for personal fiscal privileges. We explore the interesting possibility that the soft budget regime leads to an overall welfare reduction for both generations, and hence, the commitment to a deficit ceiling benefits even rent-seeking private agents.

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    File URL: http://www.cirje.e.u-tokyo.ac.jp/research/dp/2014/2014cf920.pdf
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    Bibliographic Info

    Paper provided by CIRJE, Faculty of Economics, University of Tokyo in its series CIRJE F-Series with number CIRJE-F-920.

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    Length: 19 pages
    Date of creation: Feb 2014
    Date of revision:
    Handle: RePEc:tky:fseres:2014cf920

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    1. Alan J. Auerbach, 2004. "Budget Windows, Sunsets, and Fiscal Control," NBER Working Papers 10694, National Bureau of Economic Research, Inc.
    2. Velasco, Andres, 2000. "Debts and deficits with fragmented fiscal policymaking," Journal of Public Economics, Elsevier, vol. 76(1), pages 105-125, April.
    3. Alesina, Alberto & Tabellini, Guido, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Review of Economic Studies, Wiley Blackwell, vol. 57(3), pages 403-14, July.
    4. Toshihiro Ihori & Jun-Ichi Itaya, 2004. "Fiscal Reconstruction and Local Government Financing," International Tax and Public Finance, Springer, vol. 11(1), pages 55-67, January.
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