Elected representatives have little incentive to pursue the interests of those electing them once they are elected. This well-known principle-agent problem leads, in a variety of theories of government, to nonoptimally large levels of government expenditure. An implication is that budgetary rules are seen as necessary to constrain politicians? tax and spending behavior. Popular among such constraints are various Balanced Budget Amendment proposals. These approaches, however, are shown here to have serious limitations, including failure to address the central concern of spending level. An alternative approach is advanced here that relies on a Coase-like mechanism that transfers control of government spending to the voter. Prisoner's dilemma incentives and political competition are seen to be critical to the superiority of the present mechanism to approaches requiring budget balance.
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Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number
2007-12.
Find related papers by JEL classification: H61 - Public Economics - - National Budget, Deficit, and Debt - - - Budget; Budget Systems H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
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