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A model of the optimal allocation of government expenditures

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  • FAN Simon,

    (Lingnan University)

  • PANG Yu,

    (Macau University of Science and Technology)

  • PESTIEAU Pierre,

    (Université de Liège, CORE, and Toulouse School of Economics)

Abstract

Government expenditures can be used for various socio-economic objectives, including public education, consumption of public goods and services, and social protection. This paper analyzes the optimal allocation of public expenditures among these competing functions. We establish an overlapping generations model with heterogeneous individuals in which the government optimally chooses income tax, transfer payment, educational spending, and public consumption. Our model characterizes the transitional dynamics and the steady state of each function with and without a pay-as-you-go international contract. We also conduct a simulation illustrating that the presence of an intergenerational contract may raise public consumption and social welfare in the ssteady state.

Suggested Citation

  • FAN Simon, & PANG Yu, & PESTIEAU Pierre,, 2019. "A model of the optimal allocation of government expenditures," LIDAM Discussion Papers CORE 2019018, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    • Handle: RePEc:cor:louvco:2019018
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    More about this item

    Keywords

    government spending; public education; public consumption; individual heterogeneity;
    All these keywords.

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General

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