Soft Budget Constraints, Taxes, and the Incentive to Cooperate

This paper applies the tacit coordination framework to the political macroeconomic context. The macroeconomic equilibrium is the outcome of an administration, consisting of a large number of decisionmakers whose horizon, being endogenously determined by their behavior, is uncertain. The public imposes a degree of discipline on the policymakers by its option to replace the administration and the administration imposes discipline on the policymakers by monitoring their effective expenditure. Adverse shocks or a shorter horizon are shown to reduce cooperation among policymakers and increase the inflation rate and the use of discretionary taxes. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.