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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)

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File URL: http://www.aeaweb.org/articles.php?doi=10.1257/aer.98.1.201
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Article provided by American Economic Association in its journal American Economic Review.

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

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Handle: RePEc:aea:aecrev:v:98:y:2008:i:1:p:201-36
Note: DOI: 10.1257/aer.98.1.201
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