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Mandatory versus Discretionary Spending: The Status Quo Effect

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  • Bowen, T. Renee

    (Stanford University)

  • Chen, Ying

    (AZ State University)

  • Eraslan, Hulya

    (Johns Hopkins University)

Abstract

Do mandatory spending programs such as Medicare improve efficiency? We analyze a model with two parties allocating a fixed budget to a public good and private transfers each period over an infinite horizon. We compare two institutions that differ in whether public good spending is discretionary or mandatory. We model mandatory spending as an endogenous status quo since it is enacted by law and remains in effect until changed. Mandatory programs result in higher public good spending; furthermore, they ex ante Pareto dominate discretionary programs when parties are patient, persistence of power is low, and polarization is low.

Suggested Citation

  • Bowen, T. Renee & Chen, Ying & Eraslan, Hulya, 2012. "Mandatory versus Discretionary Spending: The Status Quo Effect," Research Papers 2121, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:2121
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    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation

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