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Optimal Policy Reforms

Author

Listed:
  • Katy Bergstrom
  • William Dodds
  • Juan Rios

Abstract

This paper develops a general framework to construct optimal policy reforms allowing for fiscal spillovers onto other policymakers. The optimal reform direction depends on a single sufficient statistic for each policy, the welfare per internal cost (WPIC), which measures the welfare gain per dollar spent by the policymaker accounting for the welfare impacts of fiscal spillovers onto other policymakers. The WPIC collapses to the (welfare-weighted) marginal-value-of-public-funds if there are no fiscal spillovers and to the (welfare-weighted) net-social-benefit-per-dollar if behavioral costs accrue externally. We provide numerical examples illustrating that fiscal spillovers can meaningfully change the optimal reform direction.

Suggested Citation

  • Katy Bergstrom & William Dodds & Juan Rios, 2026. "Optimal Policy Reforms," CESifo Working Paper Series 12883, CESifo.
    • Handle: RePEc:ces:ceswps:_12883
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    File URL: https://www.ifo.de/DocDL/cesifo1_wp12883.pdf
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    More about this item

    Keywords

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    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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