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Fiscal Restraints and Voter Welfare

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  • Timothy Besley
  • Michael Smart

Abstract

This paper explores the logic of …scal restraints in a political agencymodel with both moral hazard and adverse selection. The role of thepolitical process is both to discipline incumbents who may act againstthe public interest and to sort in those politicians who are most likelyact in voters'interests. We use the model to examine the optimality ofine¢ cient taxation, limits on the size of government, increasing trans-parency, and yardstick competition. Some conclusions are surprising.For example, we show that some forms of …scal restraint can only bedesirable when incumbents are su¢ ciently likely to be benevolent.We are grateful to Jim Hines and a number of seminar participants for insightfulcomments.1

Suggested Citation

  • Timothy Besley & Michael Smart, 2005. "Fiscal Restraints and Voter Welfare," STICERD - Political Economy and Public Policy Paper Series 06, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  • Handle: RePEc:cep:stipep:06
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    References listed on IDEAS

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    1. Besley, Timothy & Case, Anne, 1995. "Incumbent Behavior: Vote-Seeking, Tax-Setting, and Yardstick Competition," American Economic Review, American Economic Association, vol. 85(1), pages 25-45, March.
    2. Andrea Prat, 2005. "The Wrong Kind of Transparency," American Economic Review, American Economic Association, vol. 95(3), pages 862-877, June.
    3. Edwards, Jeremy & Keen, Michael, 1996. "Tax competition and Leviathan," European Economic Review, Elsevier, vol. 40(1), pages 113-134, January.
    4. Krusell, Per & Quadrini, Vincenzo & Rios-Rull, Jose-Victor, 1996. "Are consumption taxes really better than income taxes?," Journal of Monetary Economics, Elsevier, vol. 37(3), pages 475-503, June.
    5. North, Douglass C., 1985. "The growth of government in the United States: An economic historian's perspective," Journal of Public Economics, Elsevier, vol. 28(3), pages 383-399, December.
    6. Bengt Holmstrom, 1982. "Moral Hazard in Teams," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 324-340, Autumn.
    7. Sam Peltzman, 1992. "Voters as Fiscal Conservatives," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 327-361.
    8. Salmon, Pierre, 1987. "Decentralisation as an Incentive Scheme," Oxford Review of Economic Policy, Oxford University Press, vol. 3(2), pages 24-43, Summer.
    9. Paul Belleflamme & Jean Hindriks, 2005. "Yardstick competition and political agency problems," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 24(1), pages 155-169, September.
    10. Meyer, Margaret A & Vickers, John, 1997. "Performance Comparisons and Dynamic Incentives," Journal of Political Economy, University of Chicago Press, vol. 105(3), pages 547-581, June.
    11. Martin Bodenstein & Heinrich Ursprung, 2005. "Political yardstick competition, economic integration, and constitutional choice in a federation:," Public Choice, Springer, vol. 124(3), pages 329-352, September.
    12. James Buchanan & Roger Congleton, 1979. "Proportional and progressive income taxation with utility-maximizing governments," Public Choice, Springer, vol. 34(2), pages 217-230, June.
    13. John Douglas Wilson, 1989. "An Optimal Tax Treatment Of Leviathan," Economics and Politics, Wiley Blackwell, vol. 1(2), pages 97-117, July.
    14. Becker, Gary S & Mulligan, Casey B, 2003. "Deadweight Costs and the Size of Government," Journal of Law and Economics, University of Chicago Press, vol. 46(2), pages 293-340, October.
    15. James E. Alt & David Dreyer Lassen, 2003. "Fiscal Transparency and Fiscal Policy Outcomes in OECD Countries," EPRU Working Paper Series 03-02, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
    16. Revelli, Federico, 2002. "Local taxes, national politics and spatial interactions in English district election results," European Journal of Political Economy, Elsevier, vol. 18(2), pages 281-299, June.
    17. John Ferejohn, 1986. "Incumbent performance and electoral control," Public Choice, Springer, vol. 50(1), pages 5-25, January.
    18. Bengt Holmstrom, 1979. "Moral Hazard and Observability," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 74-91, Spring.
    19. Peltzman, Sam, 1980. "The Growth of Government," Journal of Law and Economics, University of Chicago Press, vol. 23(2), pages 209-287, October.
    20. Fischer, Stanley & Summers, Lawrence H, 1989. "Should Governments Learn to Live with Inflation?," American Economic Review, American Economic Association, vol. 79(2), pages 382-387, May.
    21. Massimo Bordignon & Floriana Cerniglia & Federico Revelli, 2002. "In Search for Yardstick Competition: Property Tax Rates and Electoral Behavior in Italian Cities," CESifo Working Paper Series 644, CESifo Group Munich.
    22. Laffont, Jean-Jacques, 2001. "Incentives and Political Economy," OUP Catalogue, Oxford University Press, number 9780199248681.
    23. Robert Barro, 1973. "The control of politicians: An economic model," Public Choice, Springer, vol. 14(1), pages 19-42, March.
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    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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