IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this article or follow this journal

A Dynamic Theory of Public Spending, Taxation, and Debt

  • Marco Battaglini
  • Stephen Coate

This paper presents a political economy theory of fiscal policy. Policy choices are made by a legislature that can raise revenues via an income tax and by borrowing. Revenues can be used to finance a public good, whose value is stochastic, and pork-barrel spending. Policymaking cycles between a "business- as-usual" regime in which legislators bargain over pork, and a "responsible policymaking" regime in which policies maximize the collective good. Transitions between regimes are brought about by shocks in the value of the public good. Equilibrium tax rates are too high, public good provision is too low, and debt levels are too high. (JEL D72, E62, H20, H50, H60)

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.1.201
Download Restriction: no

File URL: http://www.aeaweb.org/aer/data/mar08/20060284_app.pdf
Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 98 (2008)
Issue (Month): 1 (March)
Pages: 201-36

as
in new window

Handle: RePEc:aea:aecrev:v:98:y:2008:i:1:p:201-36
Note: DOI: 10.1257/aer.98.1.201
Contact details of provider: Web page: https://www.aeaweb.org/aer/
Email:


More information through EDIRC

Order Information: Web: https://www.aeaweb.org/subscribe.html

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. V. V. Chari & Harold L. Cole, 1993. "A contribution to the theory of pork barrel spending," Staff Report 156, Federal Reserve Bank of Minneapolis.
  2. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October.
  3. George J. Mailath & Stephen Morris, 2004. "Coordination Failure in Repeated Games with Almost-Public Monitoring," PIER Working Paper Archive 05-014, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 23 Mar 2005.
  4. James M. Poterba & Jürgen von Hagen, 1999. "Fiscal Institutions and Fiscal Performance," NBER Books, National Bureau of Economic Research, Inc, number pote99-1, March.
  5. Torsten Persson & Guido Tabellini, . "Political Economics and Macroeconomic Policy," Working Papers 121, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  6. Kalai, Ehud & Stanford, William, 1988. "Finite Rationality and Interpersonal Complexity in Repeated Games," Econometrica, Econometric Society, vol. 56(2), pages 397-410, March.
  7. Alberto Alesina & Guido Tabellini, 2005. "Why is fiscal policy often procyclical?," Harvard Institute of Economic Research Working Papers 2090, Harvard - Institute of Economic Research.
  8. Perotti, Roberto & Kontopoulos, Yianos, 2002. "Fragmented fiscal policy," Journal of Public Economics, Elsevier, vol. 86(2), pages 191-222, November.
  9. Poterba, James M, 1994. "State Responses to Fiscal Crises: The Effects of Budgetary Institutions and Politics," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 799-821, August.
  10. Ely, Jeffrey C. & Valimaki, Juuso, 2002. "A Robust Folk Theorem for the Prisoner's Dilemma," Journal of Economic Theory, Elsevier, vol. 102(1), pages 84-105, January.
  11. George Mailath & Stephen Morris, . "Repeated Games with Almost-Public Monitoring," Penn CARESS Working Papers 6bf0f633ff55148107994e092, Penn Economics Department.
  12. Piccione, Michele, 2002. "The Repeated Prisoner's Dilemma with Imperfect Private Monitoring," Journal of Economic Theory, Elsevier, vol. 102(1), pages 70-83, January.
  13. Alberto Alesina & Roberto Perotti, 1994. "The Political Economy of Budget Deficits," NBER Working Papers 4637, National Bureau of Economic Research, Inc.
  14. Battaglini, Marco & Coate, Stephen, 2005. "Inefficiency in Legislative Policy-Making: A Dynamic Analysis," Papers 08-09-2005, Princeton University, Research Program in Political Economy.
  15. Gossner, Olivier & Vieille, Nicolas, 2002. "How to play with a biased coin?," Games and Economic Behavior, Elsevier, vol. 41(2), pages 206-226, November.
  16. Barro, Robert J, 1986. " U.S. Deficits since World War I," Scandinavian Journal of Economics, Wiley Blackwell, vol. 88(1), pages 195-22.
  17. Barro, Robert J., 1987. "Government spending, interest rates, prices, and budget deficits in the United Kingdom, 1701-1918," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 221-247, September.
  18. repec:oup:restud:v:57:y:1990:i:3:p:403-14 is not listed on IDEAS
  19. Bhaskar, V. & Obara, Ichiro, 2002. "Belief-Based Equilibria in the Repeated Prisoners' Dilemma with Private Monitoring," Journal of Economic Theory, Elsevier, vol. 102(1), pages 40-69, January.
  20. Daron Acemoglu, 2002. "Why Not a Political Coase Theorem? Social Conflict, Commitment and Politics," NBER Working Papers 9377, National Bureau of Economic Research, Inc.
  21. Johannes Horner & Wojciech Olszewski, 2005. "The Folk Theorem for Games with Private, Almost-Perfect Monitoring," NajEcon Working Paper Reviews 172782000000000006, www.najecon.org.
  22. Besley, Timothy & Smart, Michael, 2007. "Fiscal restraints and voter welfare," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 755-773, April.
  23. Poterba, James M., 1995. "Balanced Budget Rules and Fiscal Policy: Evidence From the States," National Tax Journal, National Tax Association, vol. 48(3), pages 329-36, September.
  24. Weingast, Barry R & Shepsle, Kenneth A & Johnsen, Christopher, 1981. "The Political Economy of Benefits and Costs: A Neoclassical Approach to Distributive Politics," Journal of Political Economy, University of Chicago Press, vol. 89(4), pages 642-64, August.
  25. Stephen Coate & Stephen Morris, . "Policy Persistence," Penn CARESS Working Papers 8a66677895e9fcb3f6d813c0c, Penn Economics Department.
  26. Michihiro Kandori, 2001. "Introduction to Repeated Games with Private Monitoring," CIRJE F-Series CIRJE-F-114, CIRJE, Faculty of Economics, University of Tokyo.
  27. repec:rus:hseeco:72153 is not listed on IDEAS
  28. Drew Fudenberg & David K. Levine & Eric Maskin, 1994. "The Folk Theorem with Imperfect Public Information," Levine's Working Paper Archive 394, David K. Levine.
  29. Giancarlo Corsetti & Nouriel Roubini, 1995. "Politically Motivated Fiscal Deficits: Policy Issues in Closed and Open Economies," Working Papers 95-21, New York University, Leonard N. Stern School of Business, Department of Economics.
  30. Sekiguchi, Tadashi, 1997. "Efficiency in Repeated Prisoner's Dilemma with Private Monitoring," Journal of Economic Theory, Elsevier, vol. 76(2), pages 345-361, October.
  31. Guillaume Fréchette & John H. Kagel & Massimo Morelli, 2005. "Behavioral Identification in Coalitional Bargaining: An Experimental Analysis of Demand Bargaining and Alternating Offers," Econometrica, Econometric Society, vol. 73(6), pages 1893-1937, November.
  32. Lucas, Robert Jr. & Stokey, Nancy L., 1983. "Optimal fiscal and monetary policy in an economy without capital," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 55-93.
  33. V. V. Chari & Harold L. Cole, 1993. "Why are representative democracies fiscally irresponsible?," Staff Report 163, Federal Reserve Bank of Minneapolis.
  34. Velasco, Andres, 2000. "Debts and deficits with fragmented fiscal policymaking," Journal of Public Economics, Elsevier, vol. 76(1), pages 105-125, April.
  35. S. Rao Aiyagari & Albert Marcet & Thomas J. Sargent & Juha Seppala, 2002. "Optimal Taxation without State-Contingent Debt," Journal of Political Economy, University of Chicago Press, vol. 110(6), pages 1220-1254, December.
  36. GOSSNER, Olivier & HERNANDEZ, Pénélope, 2001. "On the complexity of coordination," CORE Discussion Papers 2001047, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  37. Neyman, Abraham & Okada, Daijiro, 2000. "Repeated Games with Bounded Entropy," Games and Economic Behavior, Elsevier, vol. 30(2), pages 228-247, February.
  38. Moreno, Diego & Wooders, John, 1998. "An Experimental Study of Communication and Coordination in Noncooperative Games," Games and Economic Behavior, Elsevier, vol. 24(1-2), pages 47-76, July.
  39. Hassler, John & Mora, Jose & Storesletten, Kjetil & Zilibotti, Fabrizio, 2002. "The Survival of the Welfare State," Seminar Papers 704, Stockholm University, Institute for International Economic Studies.
  40. Besley, Timothy & Coate, Stephen, 1998. "Sources of Inefficiency in a Representative Democracy: A Dynamic Analysis," American Economic Review, American Economic Association, vol. 88(1), pages 139-56, March.
  41. Robert J. Aumann & Lloyd S. Shapley, 2013. "Long Term Competition -- A Game-Theoretic Analysis," Annals of Economics and Finance, Society for AEF, vol. 14(2), pages 627-640, November.
  42. Daron Acemoglu & Michael Golosov & Aleh Tsyvinski, 2006. "Markets Versus Governments: Political Economy of Mechanisms," Levine's Bibliography 321307000000000032, UCLA Department of Economics.
  43. Neyman, Abraham & Okada, Daijiro, 1999. "Strategic Entropy and Complexity in Repeated Games," Games and Economic Behavior, Elsevier, vol. 29(1-2), pages 191-223, October.
  44. Lehrer, E, 1990. "Nash Equilibria of n-Player Repeated Games with Semi-standard Information," International Journal of Game Theory, Springer, vol. 19(2), pages 191-217.
  45. William A. Niskanen, 1992. "The Case for a New Fiscal Constitution," Journal of Economic Perspectives, American Economic Association, vol. 6(2), pages 13-24, Spring.
  46. von Hagen, Jurgen & Harden, Ian J., 1995. "Budget processes and commitment to fiscal discipline," European Economic Review, Elsevier, vol. 39(3-4), pages 771-779, April.
  47. Marco Bassetto, 2006. "Politics and Efficiency of Separating Capital and Ordinary Government Budgets," The Quarterly Journal of Economics, Oxford University Press, vol. 121(4), pages 1167-1210.
  48. Tabellini, Guido & Alesina, Alberto, 1990. "A Positive Theory of Fiscal Deficits and Government Debt," Scholarly Articles 3612769, Harvard University Department of Economics.
  49. Roubini, Nouriel & Sachs, Jeffrey D., 1989. "Political and economic determinants of budget deficits in the industrial democracies," European Economic Review, Elsevier, vol. 33(5), pages 903-933, May.
  50. Henning Bohn, 1998. "The Behavior of U. S. Public Debt and Deficits," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 949-963.
  51. von Stengel, Bernhard & Koller, Daphne, 1997. "Team-Maxmin Equilibria," Games and Economic Behavior, Elsevier, vol. 21(1-2), pages 309-321, October.
  52. Bohn, Henning & Inman, Robert P., 1996. "Balanced-budget rules and public deficits: evidence from the U.S. states," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 45(1), pages 13-76, December.
  53. Henning Bohn & Robert P. Inman, . "Balanced Budget Rules and Public Deficits: Evidence from the U.S. States (Reprint 060)," Rodney L. White Center for Financial Research Working Papers 10-96, Wharton School Rodney L. White Center for Financial Research.
  54. Fudenberg, Drew & Maskin, Eric, 1986. "The Folk Theorem in Repeated Games with Discounting or with Incomplete Information," Econometrica, Econometric Society, vol. 54(3), pages 533-54, May.
  55. George-Marios Angeletos, 2002. "Fiscal Policy with Noncontingent Debt and the Optimal Maturity Structure," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 1105-1131.
  56. Leblanc, William & Snyder, James Jr. & Tripathi, Micky, 2000. "Majority-rule bargaining and the under provision of public investment goods," Journal of Public Economics, Elsevier, vol. 75(1), pages 21-47, January.
  57. Volkerink, Bjorn & De Haan, Jakob, 2001. " Fragmented Government Effects on Fiscal Policy: New Evidence," Public Choice, Springer, vol. 109(3-4), pages 221-42, December.
  58. Baron David & Kalai Ehud, 1993. "The Simplest Equilibrium of a Majority-Rule Division Game," Journal of Economic Theory, Elsevier, vol. 61(2), pages 290-301, December.
  59. Inman, Robert P, 1990. "Public Debts and Fiscal Politics: How to Decide?," American Economic Review, American Economic Association, vol. 80(2), pages 81-85, May.
  60. Alberto Alesina, 2000. "The Political Economy of the Budget Surplus in the United States," Journal of Economic Perspectives, American Economic Association, vol. 14(3), pages 3-19, Summer.
  61. repec:oup:restud:v:38:y:1971:i:113:p:1-12 is not listed on IDEAS
  62. repec:oup:restud:v:66:y:1999:i:4:p:909-28 is not listed on IDEAS
Full references (including those not matched with items on IDEAS)

This item is featured on the following reading lists or Wikipedia pages:

  1. Economic Logic blog

When requesting a correction, please mention this item's handle: RePEc:aea:aecrev:v:98:y:2008:i:1:p:201-36. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros)

or (Michael P. Albert)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.