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Soft Budget Constraints, Taxes, and the Incentive to Cooperate

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  • Aizenman, Joshua

Abstract

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.

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  • Aizenman, Joshua, 1993. "Soft Budget Constraints, Taxes, and the Incentive to Cooperate," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(4), pages 819-832, November.
  • Handle: RePEc:ier:iecrev:v:34:y:1993:i:4:p:819-32
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    References listed on IDEAS

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    1. Buiter,Willem H. & Marston,Richard C., 1986. "International Economic Policy Coordination," Cambridge Books, Cambridge University Press, number 9780521337809.
    2. Aizenman, Joshua, 1992. "Competitive Externalities and the Optimal Seigniorage," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 24(1), pages 61-71, February.
    3. Kornai, Janos, 1986. "The Hungarian Reform Process: Visions, Hopes, and Reality," Journal of Economic Literature, American Economic Association, vol. 24(4), pages 1687-1737, December.
    4. Rotemberg, Julio J & Saloner, Garth, 1986. "A Supergame-Theoretic Model of Price Wars during Booms," American Economic Review, American Economic Association, vol. 76(3), pages 390-407, June.
    5. Cukierman, Alex & Edwards, Sebastian & Tabellini, Guido, 1992. "Seigniorage and Political Instability," American Economic Review, American Economic Association, vol. 82(3), pages 537-555, June.
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    Cited by:

    1. Svensson, J, 1996. "Collusion Among Interest Groups : Foreign Aid and Rent-Dissipation," Papers 610, Stockholm - International Economic Studies.
    2. Beetsma, Roel M. W. J. & Lans Bovenberg, A., 1998. "Monetary union without fiscal coordination may discipline policymakers," Journal of International Economics, Elsevier, vol. 45(2), pages 239-258, August.
    3. Joshua Aizenman & Gunnar Gunnarsson, 2015. "Fiscal Challenges in Multilayered Unions: An Overview and Case Study," Social Sciences, MDPI, Open Access Journal, vol. 4(2), pages 1-20, May.
    4. Joshua Aizenman & Ricardo Hausmann, 1994. "Why is Inflation Skewed? A Debt and Volatility Story," NBER Working Papers 4837, National Bureau of Economic Research, Inc.
    5. Qian, Rong, 2012. "Why do some countries default more often than others ? the role of institutions," Policy Research Working Paper Series 5993, The World Bank.
    6. Sebastian M. Saiegh & Mariano Tommasi, 1999. "Why is Argentina’s Fiscal Federalism so Inefficient? Entering the Labyrinth," Journal of Applied Economics, Universidad del CEMA, vol. 2, pages 169-209, May.
    7. Mehrdad VAHABI, 2001. "The Soft Budget Constraint : A Theoretical Clarification," Discussion Papers (REL - Recherches Economiques de Louvain) 2001024, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
    8. Valeria De Bonis & Pompeo Della Posta, 2005. "Strategic interactions between monetary and fiscal authorities in a monetary union," Working Papers de Economia (Economics Working Papers) 26, Departamento de Economia, Gestão e Engenharia Industrial, Universidade de Aveiro.

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